Alchemy chief: markets risk turmoil without liability cap

One of the UK’s leading financiers has warned that companies may be forced to accept liability caps because the Big Four’s audit domination means the market could not survive the loss of a major player if investors took legal action.

Jon Moulton, the head of private equity giant Alchemy, also warned that there was a high chance of auditors facing law suits for their banking audits as investors looked for scapegoats after one of the most hostile financial periods in living memory.

‘Because the audit market is so concentrated, maybe companies will have to put caps in because we couldn’t cope with the loss of another major audit firm after Andersen,’ said Moulton.

‘Is there a risk that firms are going to be hit with enormous class action suits for their banking audits? Yes.’

Earlier this month, the leading audit firms lobbied government on the idea of liability caps as fears of litigation against them ramped up, but the idea of a limit in return for a reduction in audit fee received a lukewarm reception from UK plcs.

Speaking at a recent COA Solutions’ event, Moulton said the economy was ‘more unstable than at any time in my working career’.

Moulton added that jittery auditors were now trying to cover themselves against possible legal action by clamping down harder on their clients by demanding businesses renew credit lines or risk facing a ‘going concern’ statement.

A going concern warning questions whether a company will go bust, cease trading or seek some form of protection from creditors in the next 12 months.

The buyout expert said auditors were holding off on giving a clean audit opinion unless fresh working capital arrangements were in place. This was despite some companies having years left to run on their current facilities.

Moulton said: ‘As soon as the accountants smell even the possibility of a banking covenant being broken, even when there’s no evidence to say that it will, companies are forced to renegotiate for new facilities. It’s a real problem.’

Andrew Ratcliffe, senior audit partner at PricewaterhouseCoopers said: 'Not surprisingly, given the economic environment and the banks' tightening of credit terms, management have been looking harder at the going concern assessment they need to make this year.

Auditors need to review this assessment and decide if they concur with it. For some companies, there have been longer and more difficult conversations between auditors and mangement than for some time.

'This is inevitable given the generally tighter attitude on the part of the banks to renewal of facilities. However, our recent research has shown that, at least for the larger listed companies, these conversations are being resolved satisfactorily.'

Oliver Tant, head of audit at KPMG said: 'Given the position being taken by the banks on loan arrangements, they are now of greater interest to us. Rollover [of facilities] can no longer be assured.'

'We are unequivocally spending more time on it but we are not being any tougher. The same high standards are being maintained.'

John Flaherty, UK and Ireland assurance leader at Ernst & Young said: 'As the recession took hold in the UK last year, accountants engaged in some challenging discussions with their clients and other stakeholders over the health of corporate balance sheets, impacted by the economic downturn.

'At Ernst & Young we are working very closely with our clients to ensure we provide the right guidance and collectively reach the right audit opinion to ensure that shareholders have the information required to make critical decisions.

'Our recent study showed that there were only 2 emphasis of matter in the 2008 auditor’s reports for the 122 FTSE 250 companies who had filed their 2008 year-end accounts by mid April.

'However, there is still a lot of financial stress on companies across the public and private sectors and anecdotal evidence suggests we will see further emphasis of matter arise, as companies continue to file their 2008 year-end accounts.'