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.