The European Commission has recommended that member states limit the liability of auditors to encourage growth of alternative firms in the competitive market.

The recommendation follows consultation on the issue, and also responds to the increasing trend of litigation against firms who are not sufficiently covered by insurance that could prevent a network failure.

The Internal Markets Commission, which made the recommendation, has left it up to the individual countries to decide on how they will decide on the appropriate methods of limiting liability with options including proportional liability, capped liability.

Internal Market and Services Commissioner Charlie McCreevy said: 'After in-depth research and extensive consultation, we have concluded that unlimited liability combined with insufficient insurance cover is no longer tenable. It is a potentially huge problem for our capital markets and for auditors working on an international scale. The current conditions are not only preventing the entry of new players in the international audit market, but are also threatening existing firms. In a context of high concentration and limited choice of audit firms, this situation could lead to damaging consequences for European capital markets.'

Further reading:

Liability deals 'won't happen' without backing from SEC