Proportionate liability ‘essential’ for audit reform

Proportionate liability 'essential' for audit reform

Proportionate liability is a crucial link in the chain to audit reform, ACCA has claimed

PROPORTIONATE LIABILITY must be introduced if the audit industry is to respond to calls for reform, ACCA has claimed.

The institute’s new study, Audit reform: aligning risk with responsibility, calls on the government to consider instigating a system of proportionate liability, whereby auditors are answerable only for the damages directly caused by their own actions or negligence.

This is in contrast to the current system of joint and several liability, where a client harmed by the actions of multiple parties can pick one or more for litigation, often resulting in deep-pocketed auditors bearing the full burden of damages.

ACCA head of technical John Davies said there is widespread acceptance of the need for auditors to expand their role, arguing liability reform is essential if firms are to take on more responsibility.

Proportionate liability could also boost competition in the market by creating a safe space for smaller firms to compete with major peers. This was a key recommendation of the House of Lords report on audit, which found too much concentration at the top of the market and little room for mid-tier firms to engage.

“The reform agenda, which we support, needs to recognise this risk of exposing auditors to unreasonable levels of liability and prohibitive insurance costs,” said Davies.

In principle, clients and auditors can contractually agree limitations on the auditor’s liability, but in reality this option has been little used, and certainly not among the largest listed companies.

Australia has recently introduced the “more radical” option of proportionate liability; Davies said this is preferable to alternatives such as statutory liability caps, as these “break the responsibility link” and would be unfair to wronged clients.

The government has until now been conservative when it comes to attaching liability to auditors, saying the purpose of their report is to advise the body of shareholders on company stewardship, empowering them to influence the board of directors.

This is as opposed to audit’s purpose being advice to individual shareholders or outside observers, which could leave firms vulnerable to claims for damages.

If the role of audit expands, it could be considered as having direct relevance to the buying and selling of shares, opening up new legal arguments about where auditors’ duty of care lies and how far it extends.

Davies concluded: “It’s in everyone’s interest to see audit strengthened. Stakeholders say they want a wider remit and, in principle, auditors are ready to accept it. Liability reform must be seen as a necessary tool to help make this happen.”

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

Professional Services Why Professional Services Firms Should Ditch Folders and Embrace Metadata

2y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

2y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine

Accounting Firms Turn Accounts Payable into a value-engine

2y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021

Making Tax Digital Digital Links: A guide to MTD in 2021

2y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource