Changes to auditors' liability
April 2007
The Act retains the prohibition contained in the Companies Act 1985 against a company indemnifying its auditors against negligence or other default. This is subject to section 533, which allows the company to indemnify auditors against the costs of successfully defending a claim.
Section 310(3)(a) of the Companies Act 1985, which allows a company to buy insurance for its auditors, is not repeated in the new Act.
Auditors may enter into limited liability agreements with companies, subject to certain conditions:
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The agreement must not apply for more than one financial year; |
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The agreement must be authorised by members of the company by ordinary resolution; |
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The agreement must be fair and reasonable; and |
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The existence of the agreement must be announced in the company’s annual financial statements, or as decided by the Secretary of State. |
Even if these conditions are met, the limitation may still be overturned if the Courts decide that it is not fair and reasonable.
Section 507 creates a new criminal offence, punishable by a fine, of knowingly or recklessly causing an auditor’s report to include any matter that is misleading, false or deceptive, or omits a required statement relating to problems with the accounts. This offence can be committed by an individual auditor, or a member of an auditing firm.
In addition, section 527 of the Act allows shareholders of quoted companies to raise questions about the work of the auditors.
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