Who will pay the price for new auditor limitations?

Peter Wyman, PwC

In the wake of limitations to auditor liability, will other parties to
disputes simply end up with the bill?

That is the question troubling many as new rules allowing auditors to limit
the threat of catastrophic lawsuits come in in the UK next month. The London
Investment Banking Association is worried banks might be hit with larger
lawsuits by shareholders who cannot get recompense from traditional ‘deep
pockets’. It is a threat that the firms do not rate all that highly, perhaps
understandably.

‘The point of liability caps is not that we shouldn’t have liability, it’s
that we shouldn’t have others’ liability as well as ours,’ says Peter Wyman,
head of professional affairs at PricewaterhouseCoopers.

So the point of liability limitation is not so much to shift the burden from
one to the other, but to limit the already shifted burden away from the
auditors.

Wyman points out that the argument comes not just from investment banks, but
also from directors, who feel they might take the rap if the auditors don’t.

‘But we have no insurance. Directors’ cover available to companies is
significantly greater than most companies ever take up,’ he adds.

Wyman has a third point about the issue: ‘Get real. Look at our accounts. PwC
has assets of tuppence ha’penny. If you are a FTSE 100 company with a market cap
in the billions what proportion of a total loss could we withstand? It’s so
small as to be nothing.’

That may be less convincing: PwC, with profits of £631m at the last count,
should be able to fork out a decent sized bill if push came to shove.

The firms hope these concerns will disappear, but as liability limitation
comes in, there are bound to be some new worries raised.

The limiting of liability for auditors may, as the firms say, merely shift a
burden away from them that should never have been there anyway.

But it will also encourage shareholders to exhaust other possibilities of
recompense more rigorously than they had done before. Inevitably, that means
other parties will find themselves in slightly hotter water.

The irony, perhaps, is that the firms rarely seem to face the terribly
ruinous lawsuits they claim to, a point forcibly made in the US recently where
claims for liability limitation are being taken with a greater pinch of salt
than they are in Europe.

Perhaps the investment banks and the company directors should not fret too
much yet.