Standards
Europe split on auditor liability
The European Commission seems
no nearer to finding a consensus on tackling auditors’ liability, with the
results of its consultation on the subject finding that while the audit
profession is in favour of an initiative, other respondents are divided.
The consultation was launched in January 2007 and sought views on four possible options for liability reform: a fixed monetary cap at European level; a cap based on the size of the audited company; a cap based on a multiple of the audit fees; and the introduction of proportionate liability.
Partly this was in response to concerns about concentration in the audit
market, and the possibility that this could be exacerbated by the failure of
a major firm – the collapse of Arthur Anderson as a result of the Enron
scandal no doubt being the particular prompt here. Liability is also seen as
a barrier to more players entering the audit market.
Then there is the “deep pockets syndrome” – the belief that plaintiffs use
their auditor as insurance against any deficiencies the company might have
in its financial statements.
Respondents from the audit profession prefer either a limitation based on
capping, or one based on a combination of proportionate liability and a cap.
Other respondents are generally supportive of reform based on proportionate
liability: of these around three-quarters from countries were limitations
exist would support an initiative at EU level, and around three-quarters
from countries without limitation would reject a Commission initiative.
Among the reasons given in opposition to a limitation on auditors’ liability
were that: it would privilege auditors in comparison to other regulated
professions; it would significantly increase the liability of company
directors; and it would mainly benefit the Big Four firms instead of
enhancing opportunities for their mid-tier rivals.
Respondents opposing an initiative argued that the question of auditor
liability should remain with Member States, and that imposing an EU-wide
regulation would run contrary to the better regulation agenda.
Into this camp fall the majority of investor respondents, who generally
considered there to be more pressing issues to attend to than auditor
liability, including audit quality, competition and the ownership structure
of audit firms.
Furthermore, investors emphasised that the real threat of litigation on a
scale that could lead to a firm exiting the market comes from the US, and
therefore EU-wide action would not represent a global solution.
Also raised was the concern that a limitation of liability would reduce audit firms’ incentive to maintain high audit quality, which would ultimately affect investor confidence.
UK companies had the particular concern that any action at EU level should
not be inconsistent with new provisions introduced into UK law by the
Companies Act 2006. However, in recognition that other Member States may
have different considerations, these respondents could support an EU-wide
initiative if it was restricted to a limitation of liability based on a
contract between a company and its auditor, with the contract to be approved
by shareholders.
This split is not, it should be noted, an entirely unexpected outcome: at the time the consultation was launched, competition commissioner Charlie McCreevy warned there is probably no one-size-fits-all approach to cover the whole of the EU.
July 2007