New figures show actions against audit firms are virtually disappearing, as
law firms consider withdrawing from cases involving the Big Four.
Auditors are now approaching ‘immunity to liability’, according to leading
investors, even before the forthcoming introduction of liability limitations.
Recent figures from Cornerstone Research show that just one class action
lawsuit has been brought against an auditor in the first half of 2006, compared
with five in 2005 and eight the year before that.
The data comes at a time when law firm Herbert Smith, which acted for
Equitable Life in the £2.6bn negligence claim against Ernst & Young,
admitted that it was considering whether to stop representing clients pursuing
actions against the Big Four.
Shareholder representatives are blaming the dearth of claims against auditors
on reforms to accounting and auditing standards alongside changes to
legislation, which they claim is making it increasingly difficult to bring cases
against large audit firms and win.
‘While we keep getting beaten around the head with doom-mongering about the
imminence of catastrophic liability, the reality is rather different and, in
particular, it appears that the audit firms are gradually becoming almost immune
to liability,’ said one investor.
The study showed that of the 61 class action filings during the first half of
2006, 90% involved misrepresentations in financial documents, 74% regarded
misleading forecasts and 67% concerned GAAP violations. Despite this, less than
2% named an auditor as a defendant.
Auditors will gain further protection against liability, once the company law
reform bill comes into force. It will allow auditors to negotiate limits to
their liability exposure with clients.
‘It makes you wonder why the accounting profession continues to get away with
the push for further litigation reform, reducing the ability of investors to
bring cases when they suffer losses, while having to concede nothing substantive
in return,’ said an investor.
The investment community initially gave its consent to the introduction of
proportionate liability by contract, but since the drafting of the bill, many
feel that the quid pro quo arrangements that had been agreed have virtually
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