MPs on Tuesday heard a plea for auditors to be granted limited liability from legal actions, otherwise auditing firms might exit the market — “which would,” according to Deloitte Touche, “seriously threaten the effective functioning of the South African capital markets.”
Johan Erasmus from Deloitte gave evidence before the parliamentary committee on trade and industry, which is holding public hearings on a new Companies Bill. He said that the Bill does not provide for the liability or indemnification of auditors, unlike its predecessor law, the 1973 Act.
“International experience has shown that as companies have become larger and their activities global, and as society has become more litigious, auditors have faced an increasing number of claims, including many that, if they were successful, would be beyond their financial resources,” Erasmus told the committee.
He said that the position would be exacerbated if other parties — such as directors or other advisers who were held responsible for losses suffered by a company — were unable to pay.
“In those circumstances, under the principle of ‘joint and several’ liability, the auditors could be required to meet the full amount of the damages awarded, not just the amount for which they were held directly responsible,” he said.
He urged the committee to follow the example set in the United Kingdom where the new Companies Act, which came into effect in April, allows limited liability agreements for auditors. It only covers one financial year and is only effective if a court finds it “fair and reasonable”.
“The auditor would still be liable,” Erasmus said, “but that liability would be limited.”
He also argued against a clause that insists on auditor rotation on companies that volunteer to be audited. The problem, he said, would be when a company is located in a small rural town where only one or two auditors are available. It would then be impossible for the company to appoint an auditor even if it wanted to.
African National Congress MP Ben Turok also raised a number of problems he saw in the Bill. He asked Erasmus what he thought about the possibility of “shadow directors” making decisions about the company without being formally members of the board.
The issue was raised as a concern on Monday by the Law Society.
But Erasmus said that the Bill places a duty on directors to act in the best interests of the company.
“If you choose to take directions from a ‘shadow’, then you can be held liable,” he said. “The same applies to nominee directors. You have to act in the best interests of the company, not the shareholder, otherwise you will be held liable.” — I-Net Bridge