No legislated cap on audit liability

by admin on September 28, 2009

in Tax and Ethics

The TimesOnLine has the story under the title: Audit firms left unprotected against claims of negligence.

Under present company law, directors can agree to restrict their auditors’ liability if shareholders approve; however, to date, no blue-chip company has done so. Directors have seen little advantage in limiting their auditors’ liability, and objections by the US Securities and Exchange Commission (SEC) have also been a significant obstacle…

…They [the Big Four] warned that British business could be plunged into chaos if one of them were bankrupted by a blockbuster lawsuit…

…The SEC opposes caps on the ground that their introduction could lead to secret deals whereby directors agree to restrict liability in return for auditors compromising on their oversight of a company’s accounts. The SEC could attempt to block caps put in place by British companies that have operations in the United States…

…Three of the big four are also facing numerous lawsuits relating to their auditing of the feeder funds that channelled investors into Madoff’s Ponzi scheme.

Investors and accounting regulators worry that the big four’s dominance of the audit market is so great that British business would be thrown into disarray if one of the four were put out of business by a huge court action. All but two FTSE 100 companies are audited by the four.

Mr Wyman [partner, PWC] said: “The failure of a large audit firm would be very damaging to the capital markets at a time when they are already fragile.”

So now we have a partner at a Big Four firm admitting that failure is a distinct possibility. That’s new and a welcome sign they know there are genuine issues at stake.

Given the shoddy nature of at least some of the audits for which the Big Four are on the hook, you can hardly blame companies for demurring on the cap issue.

The Big Four case is weak. What evidence did they provide to show the potential for chaos in the markets? Have investors found a new interest in reading audit reports? Are they assuming there is no alternative to the Big Four remaining with what sounds like a license to print money but without the responsibility that should go with it? If so then it’s news to most of us who follow this matter. As I’ve said before, the audit profession needs reshaping. It has to take responsibility for itself or face forced measures that will make what’s happening today seem like a mild aberration.

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