Following changes introduced in the Companies Act 2006 removing the prohibition on auditors limiting their liability in relation to audit work, the Financial Reporting Council (FRC) has issued guidance on limited liability contracts.
Any agreement limiting the liability of a company’s auditors must be approved by the company’s shareholders. An agreement cannot cover more than one financial period, and will only be effective insofar as it is ‘fair and reasonable’. In practice the meaning of ‘fair and reasonable’ will be determined by the courts, which in such cases will amend the amount stipulated in the agreement to one which is ‘fair and reasonable’.
The FRC guidance:
• explains what is and what is not allowed under the 2006 Act;
• sets out some of the factors that will be relevant in assessing the case for an agreement;
• explains what matters should be covered in an agreement; and
• explains the process to be followed for obtaining shareholder approval.
The guidance also considers different ways in which the auditor’s liability might be limited and includes specimen clauses for inclusion in agreements and wording for resolutions and the notice of the AGM. It can be downloaded from the FRC website.