Fed up with the difficulty of trying to get the UK to pass limited liability
in anything but a watered down form, the Big Four appear to have won the
argument on another level.
A report was released by the European Commission last week arguing for capped
Citing disturbing statistics – 11 EU firms face at least 11 claims ranging
from $220m (£117m) to $1bn and five claims worth over $1bn – the study
recommended adding that ‘a limitation on auditor liability would reduce risk
caused by potential catastrophic claims’.
The consultancy that produced the research, London Economics, also discarded
the argument that caps on liability might encourage complacency, and instead
stated that a cap would result in reduced market concentration.
The study highlighted the fact that auditor liability insurance available for
higher limits has fallen sharply in recent years.
The remaining source of funds to face claims may essentially be the income of
partners belonging to the same international network.
The Big Four have long sought protection from vast and damaging claims to be
factored into company law.
Losing another big firm like Arthur Anderson, which collapsed in 2002, would
not only affect firms and the profession, but also pose serious risks to
financial stability, given the reliance of large banks, insurers and
trans-national companies on their services.
The EU moves will infuriate investors, however, who believe that limited
liability moves will water down the audit.
Peter Wyman of PwC, perhaps predictably, has commended the report. ‘They [the
researchers] understood the market, as well as the insurance market and the
economic consequences of liability reform.’
Nicholas Heaton, a partner at Lovells, the law firm, cautioned that the move
would not completely protect auditors. ‘Reputational damage will come with
failure, and reputational damage cannot be protected in the same way liability
exposure can be protected,’ warned Heaton.
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