My Lords, in seeking that Clause 14 should not stand part of the Bill, I should say that this is a probing measure to seek Government assurances about the appropriateness of facilitating the limitation of local auditor liability arrangements. The impact assessment and other documentation records that the Audit Commission currently provides an indemnity to audit firms for certain aspects of their work. This is, presumably, their statutory audit function. It also appears that it covers irrecoverable legal costs. We are told that the indemnity has been used only twice over the past five years and that auditors have faced legal action four times over a five-year period. Perhaps the Minister will let us know the amounts involved in the use of the indemnity and how much was paid.
What benefits ensue from limited liability arrangements which relieve auditors of liability in respect of negligence, default or breach of trust when conducting an audit? What are the benefits of that? The limitation of auditors’ liability has been permitted under the Companies Acts since 2008, although reports suggest that there has been little take-up. I am indebted in this regard to a Mr James Herbert, who is a corporate partner in a law firm who wrote an interesting article in Accountancy Age back in 2009. I took the opportunity of speaking to him to see whether the view he expressed then had changed. It had not.
Part of the reason for little take-up of those arrangements is attributed to issues with the SEC prohibiting UK companies registered with them from entering into those arrangements. Under the Companies Acts, any limitation must be fair and reasonable. A separate agreement is reached for each year and each agreement must be approved by shareholders. On the face of it, there is no reason why auditors should be protected from the consequences of their negligence or default in the public or private sectors. However, one of the public policy objectives was to enhance competition in the UK audit market and to address concerns about auditor concentration. As we have discussed before, the big four have deep pockets, are better able to bear the risks and have more clout with professional indemnity insurers. There are concerns that the smaller and mid-tier firms have been least able to benefit from the agreements.
Another reason for allowing such agreements might be its impact on the price of an audit. If the risk on the audit firm is less, the cost of the audit should go down. However, it is difficult to gauge whether there will be any real downward pressure on fees in the public sector, particularly given the infrequent calls on the commission’s indemnity. We can see some merit in allowing limitation of liability agreements if tightly regulated and if they can be demonstrated to help to open up the markets and put downward pressure on fees. However, we are sceptical that they will deliver that outcome. Perhaps the Minister can say when we might see a draft of the proposed regulations referred to in Clause 14 or what else might be provided in the key elements in the regulations. How do the Government propose to monitor and assess the effects of the clause?
I emphasise that in my discussions with that particular lawyer, it appeared that limitation of liability agreements
have simply have not taken off, certainly not in the private sector, so one wonders about the merits of introducing them to the public sector.
We might wish to return to the matter on Report, but it seems to me that, at the very least, there may be an argument for a sunset clause on the provisions, or at least a very clear process of assessment so that one can see whether what should be the benefits—downward pressure on audit fees and an opening up of the market to smaller firms—is actually achieved. We remain sceptical.