ICAEW president David Illingworth has indicated that the introduction of a liability cap in the UK could take the legal leash off auditors, resulting in improved audit quality and better information for investors.
Link: Hundred Group of FDs backs liability cap
At a financial reporting conference in Bruges, Belgium, Illingworth argued that the increasingly litigious nature of the market meant that auditors could not risk making bold statements about their clients’ accounts.
‘Litigation has a huge influence on audit, but it boils down to a liability issue,’ Illingworth said. ‘You have got to be very careful in setting out the quirks in clients’ accounts, as pointing out certain things could land you in hot water. Unlimited liability causes this, as firms will not take a risk that could destroy them.’
Illingworth pointed to the model in Germany, which has a limit on auditor liability. There the scope of the audit is wider than the UK and firms are more likely to make public issues of concern. He hinted that if a cap was included in the companies bill, a similar environment may arise in the UK.
‘There is a call for auditors to comment on OFR statements, internal controls, and to report in a fuller and more public way. The risk of litigation puts a dampener on this. A liability cap would assist in providing more meaningful reporting from auditors.’
However, Illingworth also argued that the public’s perception of audit opinion as fact needs to be altered.
‘It is strange that people do not think twice about differences of opinion among learned judges, yet believe that complex audits must be about precision rather than professional judgement,’ said Illingworth.
At the conference Illingworth also took at swipe at the European Commission’s and banking sector’s interference with the development of international accounting standards, particularly in relation to financial instruments standard IAS39.
‘The politicisation of the process of introducing IAS in the European Union is highly regrettable,’ he said. ‘We simply cannot let political interference on behalf of one sector – in this case bankers – derail the European adoption of IAS.
‘We cannot fall at the first hurdle and I believe that the commission must tough it out.’