The U.K. government proposed legislation last week that could limit the liability accounting firms face when auditing publicly traded companies.

The Big Four accounting firms had lobbied for an up-front cap on auditors' liability, which the legislation drafted by the Department of Trade and Industry stops short of. A wide-ranging bill released by the department instead includes a new rule that would let companies and their auditors agree that an accounting firm's liability should be limited to a proportion of any damages directly linked to its work. Shareholders would have to agree to such a limitation.

The legislation also gives shareholders the ability to question auditors during general meetings, and makes it a crime for auditors to "recklessly or knowingly include misleading, false or deceptive matters" in an audit report. In releasing the legislation, the government said that the proposals contained in the entire report -- aimed at easing burdens on smaller businesses and encouraging companies to better use electronic communications -- could save businesses up to $435 million a year by simplifying company rules.

The bill will likely be debated in Parliament over the next six months.Despite the move to limit auditor liability in the U.K., the European Commission -- the European Union's executive arm -- has resisted extending similar proposals for auditors throughout the 25-nation bloc. There are no liability limits in the United States. The Institute of Chartered Accountants of Scotland has already criticized the legislation, because it requires shareholders to renew the agreement each year.

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