The publication on Monday by the Financial Reporting Council of guidance on the adoption of limited liability agreements (LLAs) represents an important step towards resolving the whole issue of unlimited liability for auditors.

Of course auditors fully expect to be held accountable and liable for their own mistakes. But the danger with the old regime has always been that in the absence of anyone else to sue when a company fails, the auditor by default becomes the subject of unlimited litigation. Should one of the major accountancy firms fail as a result, the consequences would be dire – not just for the firm itself but for the global capital markets.

Government has recognised the risk this poses to the UK economy – which is why in a white paper in March 2005, it accepted the need to move away from unlimited liability for auditors, and introduced the necessary legislation in the 2006 Companies Act to permit companies, with shareholder approval, to enter into LLA’s with their auditors.

The challenge now is to get these LLAs in place, something that can be done by the passing of a resolution at a company’s annual general meeting. Investors have said that they would support appropriate resolutions and legal advice suggests that there is no impediment to doing so. That there is enlightened shareholder interest here is a view that has the support of the CBI.

Of course, this isn’t just an issue for the listed companies – it is something that companies of all shapes and sizes should act upon. With the guidance now in place, there is no reason why company directors, audit committees and investors shouldn’t now take that final step, putting in place the solution which all have agreed is in the best interests of the global economy, the audit profession and shareholders.

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The partner responsible for the audit shold be identified, in addition to the signature in the firm name. This would place the final responsibility on an identified individual.

Mr Philip Peapell