Auditors need to do more, says FRC chief

Audit firms must give more assurance that management claims in annual reports are reliable, in order to justify having the protection of statutory limits on their liability for company failures, the CEO of the Financial Reporting Council has said.

Auditors are only required to state whether their client’s financial statements give a ‘true and fair’ view.

But in an interview with Accountancy, Stephen Haddrill said that auditors should also verify statements made by company directors at the start of annual reports, for example about company prospects and business risks.

‘I think the world is going to be asking more of the audit profession, not less,’ said Haddrill. ‘There were no audit failures during the financial crisis. Nevertheless the accounting and auditing system did not do as much as was expected by people in terms of informing them. I don’t think it is likely people will make concessions to firms on liability except in the context of them doing more.’

The big accounting firms are worried about the threat of litigation from investors trying to recover losses from company failures.

Currently, an auditor can be sued for all losses when a company collapses, even if it is judged to be only partly to blame.

Although the Companies Act 2006 introduced limited liability agreements, whereby individual companies could voluntarily reach agreements with their auditors – subject to shareholder approval – it is understood that no large companies have signed such agreements, leaving auditors financially exposed.

Auditors want new legislation to limit their liability to the proportion of losses suffered by a company, as a result of the failure of its auditors.

Meanwhile, Haddrill appeared to question his predecessor Paul Boyle’s view that auditing had had ‘a good crisis’, saying: ‘Accountants have done faithfully what has been asked of them, but the question is, with so much going wrong, and that really not being predicted effectively, we have to ask ourselves whether we need accounting and audit to do more in future?’