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ACCA Applied Skills · Corporate and Business Law (Global) · Other company officers

Hartley Ltd's auditor, Samir, negligently missed errors in the accounts, causing Hartley a loss. Hartley's members propose a clause in the engagement letter exempting Samir from all liability for negligence. How does company law generally treat this?

A clause exempting the auditor from all liability for negligence is void. The law allows only a members-approved liability limitation agreement that restricts liability to a fair and reasonable amount, not a complete exclusion.

  1. AThe clause is valid and fully enforceable
  2. BThe clause is void, although the company may agree a permitted liability limitation agreement approved by the membersCorrect
  3. CThe clause is valid only if the directors approve it
  4. DThe clause is valid if the auditor is a member of a professional body

Explanation

Provisions exempting an auditor from liability for negligence, default, breach of duty or breach of trust are generally void. Many jurisdictions allow a limited liability agreement, approved by the members, that caps liability to what is fair and reasonable. Director approval alone or professional membership does not validate a full exemption.

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