PracticeAccounting FirmsCap report proves a liability

Cap report proves a liability

When DTI minister Jacqui Smith requested in July that the Office of Fair Trading look into issues surrounding a potential cap, many in the industry saw it as little more than a case of rubber stamping the proposals.

Link: Liability cap special report

Instead the result of the review has done little to improve the chances of a cap and has effectively passed the buck back to the government.

While there is just about enough in the report for proponents of a cap to hold out hope that they may still get their wish, the conclusions and the overall tone of the report suggested the OFT was against such a proposal.

But certain claims made in the report have outraged some accountants, who argue they are factually incorrect. And studying the report it seems the OFT has a case to answer.

‘The government must be severely embarrassed by this,’ said PwC partner Peter Wyman. ‘They will check their evidence and find it’s incorrect. It’s hard to see how they can take anything useful away from this report.’

For a long time the Big Four has argued it is impossible for them to obtain professional indemnity insurance for audit work. It had been hoped the introduction of a cap would ease the situation and that insurers would be willing to take on risk again. While the scenario is slightly different down the food chain, insurance is still hard to obtain and expensive for smaller firms.

It must have been a shock for accountants to read that ‘professional indemnity insurance, despite recent cost increases, remains available and should become more affordable and extensive in the medium term’.

Another argument in the report states: ‘We are not aware of evidence suggesting that the UK courts have made, or are liable to make, excessive damages awards against auditors.’ While the £2.6bn claim against Ernst & Young for its role as auditor of Equitable Life may not lead to ‘excessive’ damages in the eyes of some disgruntled policy holders, a crippling award is still a distinct possibility.

It also ignores other problems with court claims, according to Jane Howard, partner at commercial law firm Reynolds Porter Chamberlain. ‘This misses the point,’ she said. ‘The really big claims do not actually make it to court, as at some point along the way the defendant firm pays out a large sum, often unjustified, in order to buy themselves out of the risk inherent in going to trial.’

There are also a few choice words in the report about the design of a cap, after all but two of the suggestions were labelled potentially anti-competitive. Of these two, there were reservations that a cap based on audit fee could ‘distort incentives to maintain or improve audit quality’.

The other option of a fixed-level cap has been opposed by mid-tier firms, who fear the bar would be set too high for it to be of any use to them.

‘I hope the DTI takes into account other factors than just the report when making its decision,’ said Tony Bromell, head of accountancy markets and ethics at the ICAEW. ‘It is strangely ambivalent, has been done in a rapid space of time and the original questions were slightly different to the ones that were answered.’

So far the DTI has said little – and time is running out. Legislation will have to be introduced into the companies bill shortly after parliament returns in September.

Meanwhile, the report may leave civil servants scratching their heads.

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