Warning on improved protection for auditors

One of Britain's largest institutional shareholders has warned against the dangers of increasing protection for auditors from catastrophic litigation.
Morley Fund Management, which manages £110bn of assets, said shareholders had "grave concerns" about pleas by the big four accounting firms to limit auditors' liability to prevent a multi-billion pound legal claim potentially sinking one of them.
It said further reductions in auditor liability in isolation could undermine the audit framework which was an important part of investor protection. "It [the framework] helps tackle the conflict between the information a board might wish to release and the information ...that the investor needs," said lain Richards, head of governance and public policy at Morley.
"Investors and policy makers need to consider whether a change would aggravate perceived shortcomings in the service currently provided by statutory audits."
Mr Richards said there might be a case for deciding that unlimited auditor liability was "a reasonable proposition in an increasingly litigious world". However, the current lack of transparency and disclosure to investors had seen the risk of litigation become a surrogate form of comfort for investors. "Boilerplate" audit reports, covering the legal minimum, provided little assistance to investors where companies had a creative or aggressive accounting. "Further reductions in auditor liability would need to be matched by a long overdue reinvigoration of the statutory audit," he said.
The government remains to be convinced by the big four's plea to limit auditors' liability and is seeking more evidence about their concerns. Even if ministers decide legislation is appropriate, limited liability is unlikely to be included in the companies bill that will be announced in November's Queen's Speech.