Hewitt reforms shield auditors on liability claims

Auditors are claiming a victory in their long battle to limit damage claims from business failures.

Auditors are claiming a victory in their long battle to limit damage claims from business failures.

The accountancy profession was reacting yesterday to company law reforms published by the Government that also promise to cut red tape and deliver £250m of annual cost savings for businesses.

The draft Company Law Reform Bill, published by the Department of Trade and Industry, aims to modernise company law and make it more flexible, especially for small businesses, which would benefit from £100m in cost savings.

Patricia Hewitt, the Secretary of State for Trade and Industry, said: "We needed a thorough overhaul of the law to make it more suited to the needs of our companies."

The reforms will allow auditors, which currently face unlimited liability, to negotiate the size of claims according to their blame. The amounts will be determined by the courts. When negotiating contracts with auditors, firms will either agree to limit auditors' liability, or pay a much higher price for an unlimited liability contract.

Anthony Carey, a partner in RSM Robson Rhodes, said: "It ensures the auditors accept full responsibility for their own mistakes but not those of the directors or other parties as well." He said the reforms would put more pressure on shareholders to push for good corporate governance. The proposals also make it possible for auditors to be sent to jail if it is found that they are involved in any fraud, for which they would continue to be fully liable.

Some auditors, including PricewaterhouseCoopers, one of the Big Four accounting firms, had initially pushed for a fixed ceiling on claims, but last year Ms Hewitt rejected the capping of liability as inappropriate. Nonetheless, PwC yesterday welcomed the draft Bill as a "very big step forward".

The reforms also include simpler rules to form a company, cutting paperwork through electronic communication with shareholders and removing the need for a company secretary. The Government is consulting on the draft Bill until 10 June and it could become law next year.