Europe demands audit liability reform

Charlie McCreevy

Charlie McCreevy, internal markets commissioner

The European
is poised to urge member states to limit the liability of
auditors, opening up the prospect of pan-European mergers of firms.

The responses to a consultation on auditor liability were published last week
by the Commission and, though they were subsequently removed from the body’s
website, are understood to have overwhelmingly backed limited liability plans.

Only some investors and the French audit market posed opposition to the
moves, set in motion by internal markets commissioner Charlie McCreevy.

Peter Wyman, head of professional affairs at
PricewaterhouseCoopers, said
that, even where the firms’ responses were excluded, ‘you have a simple majority
in favour of liability limitation’.

Wyman said he expected the EC to issue a ‘recommendation’ ­ a measure less
forceful than a directive urging member states to act ­ for liability reform to
go ahead across Europe. Such a move could be in place by the autumn and would
put pressure on the US to introduce similar rules. ‘This is a huge step. Around
12 member states currently have liability limitation in place, and that is now
likely to go up to 23 or 24. It would, [among other things], facilitate the
creating of pan-European partnerships.’

E&Y’s global director of regulatory and public policy, Jeremy Jennings,
said: ‘A significant minority, mainly from the investor and insurer communities,
were opposed to any reform.’ Both the
Investment Management
and Hermes stressed that the key issue was audit quality, but
said that, were reforms to be introduced, they favoured proportionate liability.
CEA, a group of European insurers with £4.4bn invested on the continent’s
capital markets, said: ‘A strong case for liability reform for auditors at EU
level has not been made yet and the question of whether any change is
appropriate remains unresolved.’

US ‘will follow suit’ on liability’  

The US could have liability limitations ‘by the end of the next
administration’ following any EU moves on the issue.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, thinks
the moves in Europe have built up a head of steam, which could now overhaul the
way the profession works around the world and even open the prospect of
international integration of firms.

Risks arising from unlimited liability have been a barrier to integration of
firms for many years.

‘A year ago, nobody was prepared to suggest this was a good idea,’ said

‘Now, every report you read says this is a necessary thing for the US to do,’
Wyman said.

The US has a review under way of the audit market, which includes liability
among other things.

Lobbyists for class action lawyers, who have launched huge claims against
audit firms in the past, are likely to oppose restriction of auditor liability.

Public opinion in the US is also likely to oppose protection for firms given
attitudes to white collar crime there. ‘There’s a realistic chance we would get
this reform through by the end of the next administration,’ Wyman said.

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