Auditors Seeking Limitation Of Liability

It is when times get tough that problems which might have been easy to gloss over in better times start to make themselves visible. When serious problems that have remained undiscovered for a substantial period come to light, a company's auditors may well find themselves facing a writ.

The sections of the Companies Act 2006 which allow auditors to limit their liability for audit work, with the agreement of their audit client, are now in force. However, because the Financial Reporting Council is delaying the provision of guidance on the form such agreements should take, it is likely to be some time before your auditor proposes a 'liability limitation agreement' to you.

Recently, a claim against a firm of auditors, which had failed to spot an £80 million fraud committed by the managing director of a company, was struck out by the Court of Appeal. The Court concluded that the claim, if successful, would confer 'benefits on the corporate vehicle, which was used to commit the fraud and was not the victim of it'. Because the claim arose from the illegal behaviour of the claimant, it failed.