Auditors in protest at plans for liability limit

Patricia Hewitt, the Trade Secretary, angered auditors yesterday with the publication of the Government's proposals to limit their liabilities when a company goes bust.

The audit profession had been seeking a limit based on a "proportionate liability system" to replace the current rules that impose unlimited liabilities on auditors.

David Illingworth, the president of the Institute of Chartered Accountants in England & Wales, said: "If you are 20 per cent of the blame you ought to get 20 per cent of the bill. That is the basis of the system which we wanted."

Instead, under the Government's proposals, auditors will be able to limit their liabilities but only by using a calculation based on a multiple of an auditors' fees or turnover. This, say auditors, could cripple smaller audit firms and concentrate power among the big four audit firms, which might be bad for corporate governance.

In the wake of such high profile corporate collapses such as Equitable Life, the Government's consultation document yesterday also announced options to limit the liabilities of company directors, although Mrs Hewitt did not rule out maintaining the status quo.

She said one option might be to allow companies themselves to limit the liabilities of their directors in their articles of association or simply rely on liability insurance. The proposals will also consider allowing a company to pay a director's legal costs up front.

However, the more contentious proposals were those governing auditors' liabilities.

One suggestion was to allow audit firms to limit their liabilities subject only to the general law of contracts. Mr Illingworth said this could be a step forward assuming relevant areas of company law were repealed to make way for it.

However, he said there would still have to be some sort of framework which took into account the Government's other proposals for calculating auditors' liabilities.

These include capping liabilities at a multiple of an audit fee or a multiple of total fees paid to the audit firm including non-audit work. Another option to be considered will be capping liabilities at a multiple of a firm's turnover. A final option is simply to limit liabilities at a fixed rate with one rate applying to the big four firms and another lower rate for smaller audit firms. Mrs Hewitt said: "A competitive and efficient audit market is fundamental to strong corporate governance and a successful, responsible business environment."