top stories
Auditors' limitation of liability
From 6 April 2008 new provisions introduced by the Companies Act 2006 enable auditors to limit their liability in respect of statutory audit work carried out for a company by entering into specific agreements with their clients.
The new provisions contained in sections 534 to 538 of the Act allow the validity of liability limitation agreements that purport to limit the amount of liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company.
For a liability limitation agreement to be effective it needs to fulfil the conditions that it is approved by a resolution of the company's shareholders and that the arrangements contained are fair and reasonable having regard to the particular circumstances. Furthermore a liability limitation agreement cannot cover more than one financial year and must expressly indicate the financial year in relation to which it applies.
After having consulted on draft guidance to directors on the use of liability limitation agreements the Financial Reporting Council issued final guidance in June 2008. The final guidance published can be viewed on the Financial Reporting Council's website 