The provisions of the new Companies Act 2006 in relation to the appointment, functions, removal/resignation and liability of auditors come into force on 6 April 2008. Although much of the existing law is restated there are some potentially important changes for auditors, directors and shareholders alike to be aware of.
There is a duty on auditors to provide accurate auditors' reports and under the new provisions it is now an offence, punishable by fine, to cause an auditor's report to include anything misleading, false or deceptive. Although this appears on the face of it to be very onerous for auditors, it is expected that prosecutions will only be pursued in the most serious cases with other cases being dealt with by the relevant professional bodies.
The general rule that an auditor may not be indemnified against negligence or breach of duty or trust remains though one significant exception has been added. Auditors and companies may now enter into agreements, which purport to limit the liability to the company of the auditor. Such agreements must relate to one specified financial year and the company members must also have first either approved the principal terms of the agreement or waived the requirement for their approval altogether.
Liability Limitation Agreements which meet the above conditions will be enforceable except where the limitation would result in the company being able to recover less than what is considered fair and reasonable in light of the auditors responsibilities, professional standards expected and the nature of their contractual obligations to the company.
Ailsa Mapplebeck is an associate specialising in corporate finance with UK law firm Shepherd and Wedderburn.