The Financial Reporting Council today announced the establishment of an independent working group to produce guidance on the use of agreements to limit the liability of auditors of public companies. This has been done at the request of market participants.

The working group will be chaired by Sir Anthony Colman, who was until recently a Judge of the Commercial Court, and includes representatives of companies, investors and the accountancy profession.

Under Sections 534 to 538 of the Companies Act 2006, 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 at a general meeting.

The Working Group has been asked to produce draft guidance for public consultation later in 2007. The draft guidance will address the form such agreements would take, and the process by which they would be agreed, but will not seek to define what a “fair and reasonable” amount would be.

Announcing the Working Group, Paul Boyle, Chief Executive of the Financial Reporting Council, said:

“Earlier this year the FRC was approached by the accountancy profession and asked whether it would be willing to prepare guidance on the use of these liability limitation agreements. We agreed to do so only if the proposal was also acceptable to the corporate and investment communities, and that remains the basis on which we will proceed. The FRC will only give its endorsement to guidance that enjoys broad support from all market participants.

“I am particularly pleased that Sir Anthony Colman has agreed to chair the working group. The likelihood of a successful outcome to this exercise can only be improved by it being led by someone with his great experience and expertise”

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. 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 Investigation and Discipline Board) and by the Council. The Committee on Corporate Governance, whose members are drawn from the Council, assists it in its work on corporate governance.
2. The terms of reference of the FRC working group are:

   To prepare guidance, for approval by the FRC, on the use of limited liability agreements, as provided for in the Companies Act 2006 provisions on auditor’s liability in relation to statutory audit.
   
   It is intended that the guidance should include, at least:

   • A suggested standard form, including the “principal terms”, for such an agreement; and
   • A suggested process for the effective implementation of such an agreement, including for obtaining shareholder approval.

   The guidance will not address the assessment of what might be regarded as “fair and reasonable in all the circumstances of the case”, nor provide a mechanism for calculating such an amount. That is to be assessed on a case by case basis and, in any event, the ultimate decision on whether an amount is “fair and reasonable in all the circumstances of the case” will lie with the Court.
   
   It is intended that any final guidance should be published no later than the first quarter of 2008.
   

    

3. Sir Anthony Colman was a Judge of the Commercial Court, in the High Court, London from 1992 to 2007, specialising in commercial litigation of all kinds, prior to which he practised as a barrister at the Commercial Bar for thirty years, specialising in primary insurance and reinsurance. He is co-founder and member of the management committee of the European Commercial Judges Forum, and has been Principal of the Faculty of Mediation and Vice President of the Academy of Experts, London since 2002. He is author and co-editor of The Practice and Procedure of the Commercial Court, and General Editor and contributor to the Encyclopaedia of International Commercial Litigation.
4. The members of the working group are:
   
   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
   Lisa Cameron, General Counsel, Ernst & Young LLP
   Vanessa Knapp OBE, Partner, Freshfields Bruckhaus Deringer
   Paul Lee, Director, Hermes Equity Ownership Service
   Rosemary Martin, General Counsel, Reuters Group PLC & Vice-Chair GC 100 Group
   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. All press enquiries should be addressed to Ian Rodger on 020 7492 2395; email: i.rodger@frc.org.uk.