Accounting, Organizations zyxwvutsrqponmlkjihgfedcbaZYXWVUT and Society, Vol. 23, No. 1, Pp. 105-128, 1998 c 1998 Else&r Science Ltd All rights reserved. Printed in Great Britain 0361.3682/ 98 $19.00 + 0.00 PII:SO361-3682(97)00006-S zyxwvutsrqponmlkjihgfedcbaZYX INTERSECTIONS OF LAW AND ACCOUNTANCY: UNLIMITED AUDITOR LIABILITY IN THE UNITED KINGDOM* CHRISTOPHER J. NAPIER School zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCB of zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFED Management, University of Southampton Abstract In recent years, considerable pressure has grown within the British auditing industry for limitation of liability arising from negligent misstatements in audit reports. Under British company law, auditors are forbidden from contracting with companies for their liability to be restricted. This legal provision was introduced in the Companies Act 1929 as a byproduct of legislation relating to directors’ liability. The paper explores the background to this legal provision, observing that auditor liability cannot be viewed as a selfcontained matter of interest only to a limited community. Attitudes to auditor liability have been shaped against a background of changes in the law of negligence, some, but by no means all, arising from cases involving auditors. Moreover, changing concepts of the position of the auditor within corporate governance struc- tures have at different times encouraged and discouraged the assimilation of the legal treatments of audi- tors and directors. These concepts themselves reflect differing notions of what actually constitutes the “company”: a collectivity of shareholders or a separate entity controlled by directors. These notions emerged against a background of corporate failure and the need to allocate losses among various parties with different degrees of culpability for failure. However, legal developments do not account by themselves for changing attitudes within the auditing industry towards unlimited liability; acceptance of full responsibil- ity for one’s statements, adopted as a badge of professional status, has more recently been seen as inhi- biting the commercial development of British auditing. 8 1998 Elsevier Science Ltd. All rights reserved The auditors of British companies are legally law since general incorporation of companies prevented from restricting their liability to the was permitted in 1844. The prohibition was company arising from negligence, default, introduced in the late 192Os, following a cor- breach of duty and breach of trust. Nor is it porate failure made more scandalous by a per- only auditors who face such a prohibition; ception that responsible directors and auditors directors are also unable to limit their liability to were able to escape liability for their negligence their company. However, this legal prohibition by appealing to contractual exclusion clauses. has not been a consistent element of company Yet it is only relatively recently] that the *Earlier versions of this paper were presented at workshops and seminars at the European Institute for Advanced Studies in Management, Brussels, the University of Edinburgh and the London School of Economics and Political Science, and at the Nineteenth Annual Congress of the European Accounting Association, Bergen, May 1996. The author wishes to acknowl- edge the helpful comments of participants at these presentations, in particular Richard Baker, Ronald Dye, David Flint, Pascal Frantz, Miles GietzmaM, David Gwilliam, Anthony Hopwood, Richard Macve, Michael Power and Stephen Walker, as well as those of an anonymous reviewer. ‘Although there was some degree of press comment in the early 1970s concerning accountants’ liability (for example, “ Limiting professional liability” , The Accountant, 1 June 1972, p. 710), auditing textbooks of the time just set out the legal position relating to liability without comment on the issue of liability limitation. For example, @icer and Pegler’s Practical Auditing (Bigg, 1969) merely refers neutrally to the statutory ban on limiting auditor liability, while Cooper’s Student’s Manual @Auditing (1971) does not even do this. 105