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July 15, 2008

UK receives limitation guidance

The UK Financial Reporting Council (FRC) has published guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the Companies Act 2006.

The guidance aims to help company directors assess whether to enter into an agreement with an auditor and how to implement the agreement if they decide to do so.

The guidance explains what is permissible under the Act, what matters should be covered in an agreement and provides specimen clauses for inclusion in agreements. It also sets out some of the factors that will be relevant when assessing the case for an agreement and explains the process to be followed for obtaining shareholder approval.

FRC chairman Christopher Hogg said: “I believe [the guidance] will provide valuable assistance to companies considering entering into auditor liability limitation agreements.

“Each company must make its own decision as to whether to enter into such an agreement with its auditors. However, the FRC believes that it would be desirable for companies to discuss with their leading shareholders and with their advisers the merits of entering into an agreement in their particular circumstances.”

Deloitte UK said the firm will refer to the guidance in its discussions with clients.

Vince Niblett, head of audit, said: “This guidance provides a useful framework for dialogue between auditors, companies and shareholder groups. We are very pleased the government has demonstrated its support for Liability Limitation Agreements by the statement from the Secretary of State.

“There are still some challenges ahead as the guidance is not strong in areas such as the application of liability limitation agreements in a group context. Those issues concern detailed implementation and will be dealt with between auditors and clients.”

The FRC will review the impact and content of the guidance in the second half of 2010 to ensure it incorporates developments in generally accepted practice.

Institute of Chartered Accountants in England and Wales chief executive Michael Izza urged all listed companies in the UK to implement the guidance in their next financial reporting cycle.

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