US auditors call for urgent action on liability reform

Paul Boyle, FRC chief executive

Auditors in the US have issued a stern warning to the US Treasury that sufficient steps are not being taken to avert the risk of catastrophic litigation destroying the profession.

Cynthia Fornelli, director for the Centre for Audit Quality (CAQ) ­ which has a membership of about 800 audit firms ­ said that proposals from the US Treasury’s Advisory Committee on the Auditing Profession, to improve the profession’s service to the capital markets, did not contain ‘even the limited litigation reforms discussed’.

‘These ideas include appeal bond caps, appeals of denials of motions to dismiss, strengthened bankruptcy defenses… and most importantly, a liability caps system for audit firms,’ Fornelli wrote.

CAQ’s frustration with the US Treasury for ignoring the liability reforms sought by the profession comes amid delicate discussions in a similar vein between the UK’s Financial Reporting Council (FRC) and the Securities and Exchange Commission (SEC).

FRC chairman Paul Boyle is currently lobbying SEC chairman Christopher Cox to back the UK’s limited liability arrangements, now in law. If the SEC does not accept the UK’s arrangements, then audit firms in the UK ­ with US-listed clients ­ will also be prevented from entering into limited liability arrangements.

While the sentiments from the CAQ are not new to the Treasury committee, led by former SEC chairman Arthur Levitt, they are forthright in their accusation that the profession’s concerns have been ignored.

Fornelli warned further: ‘If this liability concern is not addressed, many of the committee’s other recommendations will prove unworkable due to the current litigation context. And as we pointed out in our first letter, we believe that fulfilling the committee’s mandate to address “the sustainability of the public company auditing profession” includes meaningfully tackling this issue.

‘We fear that the committee may be swayed to inaction by arguments that link high audit quality to auditor liability and the notion that massive litigation exposure is in some way beneficial to the profession and to the capital markets and investors.’

Statement secrecy

If US firms want to gain support for limiting liability, they should reconsider their reluctance to publish their financial statements, says UK regulatory chief Paul Boyle.

The FRC chairman made the comments on the back of warnings from CAQ that firms could fail from catastrophic litigation. But this was also coupled with CAQ’s support for filing financial statements only on a confidential basis to the US audit oversight board.

‘One of the points it [the CAQ] is arguing is that firms should not publish their financial statements. There is a link here, which they [members] might want to think about, between them not wanting to publish these statements and the lack of support for limiting liability.

‘There are still people who say the firms are exaggerating the true scale of liability risk,’ said Boyle.
Boyle said UK firms generally had higher levels of transparency than their US counterparts, which contributed to securing more support for limiting their liability.