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Accountancy Age: Firms initiate tentative liability cap negotiations

Penny Sukhraj, Accountancy Age, 21 Jun 2007

Informal arrangements being made to ensure arrangements are in place before the caps comes into effect in October 2008

Firms have begun liability cap negotiations with their clients – in some cases amounting to about ten times the audit fee.

The moves come on the back of legislation introduced last year that comes into effect in October 2008. The informal arrangements are being made to ensure arrangements are in place before the caps come in.

Firms may either choose to cap liability as a multiple of audit fees – with suggestions of between five and ten times the audit fee being mooted – or on the basis of ‘proportionate’ liability.

A Big Four source familiar with current negotiations said: ‘My understanding is that the firms have begun putting these into their engagement letters.’

A ten-times multiple would see the largest audit liabilities capped at £500m for 2006.

E&Y’s liability for BP would have been capped at £550m under such an arrangement; KPMG’s at HSBC at around £400m; PricewaterhouseCooper’s at Royal Dutch/Shell at £520m; and Deloitte’s at WPP at £125m. The four companies pay the largest audit fees, according to our sister title Financial Director.

Such moves are thought to be tentative, with other senior figures claiming they are not yet taking place.

The FRC is set to produce guidance on the issue, but the moves are at an early stage. FRC chief executive Paul Boyle said: ‘We’re looking to identify an independent chairman to lead this work. We’ve taken soundings from a few people, but its still a bit of a hot potato. We haven’t been overwhelmed by offers.’

Lovells partner Nicholas Heaton said he was not surprised that firms and companies had begun negotiations given the timeframe.

‘If you want to put a cap in place, you need to have a dialogue with the audit client. And shareholders have to approve the cap,’ he said. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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