Auditor liability: ISC statement on auditor liability limitation agreements

On 30 June 2008, the Institutional Shareholders' Committee (which includes the ABI and NAPF) published a statement on what institutional investors are likely to expect from companies seeking shareholder approval for agreements they want to make to limit the liability of their auditors. The statement has been issued to coincide with the publication of the Financial Reporting Council's "Guidance on Auditor Liability Limitation Agreements" (see PLC Legal update, Auditor liability: FRC publishes guidance on use of auditor liability limitation agreements ) (FRC guidance).

Points include:

- Investors are generally willing to support "agreements providing for proportional liability or those providing for liability to be at the level that is fair and reasonable". There should be no fixed cap element.

- Directors should remember that companies do not have to enter into these agreements.

- Investors will welcome early discussion about proposed agreements.

- Investors are unlikely to support agreements after the audit work for the year has been completed.

- Audit committees should disclose the ways they have used the discussions with auditors on liability to assure themselves that audit quality will be preserved and enhanced.

- Companies will need to disclose how limitation of auditors' liability will apply throughout the group. Investors will not support proposals to limit auditor liability unless the substantive effect is that proportionality applies throughout the group.

- Companies will be expected to use the specimen principal terms set out in the FRC guidance. Companies choosing not to follow FRC guidance will need to consult early with shareholders.

Companies meeting these expectations are most likely to gain support from their shareholders.