These follow the consultation on the White Paper issued by the Government in March 2005 in response to the audit profession's calls to be permitted to limit their liability, in the hope of preventing a further collapse like Arthur Andersen.

The draft clauses allow auditors to agree with companies' limits on the auditor's liability. They do not, contrary to previous indications, dictate how those limits should be set, and they give considerable freedom to auditors and companies in what they agree.

An agreement will not be effective to limit liability to less than what is fair and reasonable in all the circumstances, having regard to the auditor's responsibilities, professional standards and contractual obligations. Agreements will also be subject to shareholder approval.

The draft clauses do not introduce proportionate liability, which had been trailed in the White Paper. That proposal would have allowed an auditor's liability to be limited to the amount of loss for which the court considered the auditor to be responsible, having regard for the responsibility of others, such as directors and other advisers.

A new criminal offence of knowingly or recklessly making an audit report that includes any matter that is misleading, false or deceptive in a material particular is proposed. This is largely as anticipated but will apply to individuals only.

There will be concern among auditors about the introduction of a criminal offence, in particular that the offence can be committed through recklessness, which is a relatively low threshold and is a test that may be difficult to apply to the audit process.

If shareholders in quoted companies wish to raise matters relating to the audit or the circumstances of an auditor leaving office at the AGM, the company will be required to set these out on its website but there will be no obligation on the auditor to answer questions.

The senior statutory auditor will now have to sign the audit in their own name. They will not incur any additional civil liability by doing so but will be exposed to the new offence.

The procedure for auditor's resignation statements has been revised. Companies will be able to challenge these in a wider range of circumstances.

The proposals on requiring publication of audit contracts and fee details are to be dealt with as part of the Financial Reporting Council's review of the Combined Code.

The surprise in the package is the approach to allowing auditor's to limit their liability. While this allows companies and auditors a great deal of freedom, there is no guidance on what limits will be considered reasonable and so enforceable.

The clauses will be subject to further consultation closing on September 9 2005.

Nicholas Heaton is a partner at Lovells dispute resolution practice