The Financial Reporting Council (FRC) today published guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the Companies Act 2006.

The guidance has been produced by a working group chaired by Sir Anthony Colman, previously a Judge of the Commercial Court, and including representatives of companies, investors and the accountancy profession.

The guidance:

• explains what is and is not allowed under the 2006 Act;
• sets out some of the factors that will be relevant when assessing the case for an agreement;
• explains what matters should be covered in an agreement, and provides specimen clauses for inclusion in agreements; and
• explains the process to be followed for obtaining shareholder approval, and provides specimen wording for inclusion in resolutions and the notice of the general meeting.

In the introduction to the guidance, the FRC sets out its views on the use of auditor liability limitation agreements.

Introducing the guidance, Sir Anthony Colman said:

“The guidance is addressed to company directors, to help them assess whether to enter into an agreement with their auditor, and to help them implement the agreement if they decide to do so. One of the key considerations when making that assessment will be the likely views of the shareholders, as they must approve any agreement.”

Welcoming the guidance, Sir Christopher Hogg, Chairman of the Financial Reporting Council, said:

“The FRC is extremely grateful to Sir Anthony and the working group for the time and effort that has gone into developing this guidance, which I believe will provide valuable assistance to companies considering entering into auditor liability limitation agreements.

“Each company must make its own decision as to whether to enter into such an agreement with its auditors. However, the FRC believes that it would be desirable for companies to discuss with their leading shareholders and with their advisers the merits of entering into an agreement in their particular circumstances”.

The FRC will review the impact and content of the guidance in the second half of 2010 to ensure that it incorporates developments in generally accepted practice and any other new developments.

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.
2. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
3. Under Sections 532 to 538 of the Companies Act 2006, which came into force on 6 April 2008, auditors are able to negotiate with companies whose accounts they are auditing to limit liability by contract to an amount that is “fair and reasonable in all the circumstances”. A separate agreement will be required for each year’s audit, and each one must be approved by the company’s shareholders.
4. The members of the working group were:

   Sir Anthony Colman (Chairman)
   Richard Bint, Head of Professional Services, PKF (UK) LLP
   Neil Brown, Head of Governance and Responsible Investment, Threadneedle Asset Management Ltd [until December 2007]
   Lisa Cameron, General Counsel, Ernst & Young LLP
   Guy Jubb, Head of Corporate Governance, Standard Life Investments Ltd [from January 2008]
   Vanessa Knapp OBE, Principal Consultant, Freshfields Bruckhaus Deringer LLP
   Paul Lee, Director, Hermes Equity Ownership Service
   Rosemary Martin, Chief Executive, Practical Law Company Ltd
   Peter Smith, Chairman, Savills plc
   Chris Hodge, Financial Reporting Council (Secretary)
   
   Observers:
   
   Richard Fleck, Chairman, Auditing Practices Board, Financial Reporting Council
   Richard Leyland, Director, Corporate Law and Governance Directorate, Department for Business, Enterprise and Regulatory Reform

5. The Institutional Shareholders’ Committee has issued a statement setting out what institutional investors are likely to expect from companies proposing to enter into an auditor liability limitation agreement. The statement can be found at: http://www.institutionalshareholderscommittee.org.uk/library.html.
6. All press enquiries should be addressed to Paul Boyle on 020 7492 2390. Email: p.boyle@frc.org.uk