Alchemy chief: markets risk turmoil without liability cap

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One of the UK’s leading financiers has warned that companies may be forced to
accept liability caps because the Big Four’s audit domination means the market
could not survive the loss of a major player if investors took legal action.

Jon Moulton, the head of private equity giant
Alchemy, also
warned that there was a high chance of auditors facing law suits for their
banking audits as investors looked for scapegoats after one of the most hostile
financial periods in living memory.

‘Because the audit market is so concentrated, maybe companies will have to
put caps in because we couldn’t cope with the loss of another major audit firm
after Andersen,’ said Moulton.

‘Is there a risk that firms are going to be hit with enormous class action
suits for their banking audits? Yes.’

Earlier this month, the leading audit firms lobbied government on the idea of
liability caps as fears of litigation against them ramped up, but the idea of a
limit in return for a reduction in audit fee received a lukewarm reception from
UK plcs.

Speaking at a recent COA Solutions’ event, Moulton said the economy was ‘more
unstable than at any time in my working career’.

Moulton added that jittery auditors were now trying to cover themselves
against possible legal action by clamping down harder on their clients by
demanding businesses renew credit lines or risk facing a ‘going concern’

A going concern warning questions whether a company will go bust, cease
trading or seek some form of protection from creditors in the next 12 months.

The buyout expert said auditors were holding off on giving a clean audit
opinion unless fresh working capital arrangements were in place. This was
despite some companies having years left to run on their current facilities.

Moulton said: ‘As soon as the accountants smell even the possibility of a
banking covenant being broken, even when there’s no evidence to say that it
will, companies are forced to renegotiate for new facilities. It’s a real

Andrew Ratcliffe, senior audit partner at
said: ‘Not surprisingly, given the economic environment and the banks’
tightening of credit terms, management have been looking harder at the going
concern assessment they need to make this year.

Auditors need to review this assessment and decide if they concur with it.
For some companies, there have been longer and more difficult conversations
between auditors and mangement than for some time.

‘This is inevitable given the generally tighter attitude on the part of the
banks to renewal of facilities. However, our recent research has shown that, at
least for the larger listed companies, these conversations are being resolved

Oliver Tant, head of audit at
KPMG said: ‘Given the
position being taken by the banks on loan arrangements, they are now of greater
interest to us. Rollover [of facilities] can no longer be assured.’

‘We are unequivocally spending more time on it but we are not being any
tougher. The same high standards are being maintained.’

John Flaherty, UK and Ireland assurance leader at
Ernst & Young said: ‘As
the recession took hold in the UK last year, accountants engaged in some
challenging discussions with their clients and other stakeholders over the
health of corporate balance sheets, impacted by the economic downturn.

‘At Ernst & Young we are working very closely with our clients to ensure
we provide the right guidance and collectively reach the right audit opinion to
ensure that shareholders have the information required to make critical

‘Our recent study showed that there were only 2 emphasis of matter in the
2008 auditor’s reports for the 122 FTSE 250 companies who had filed their 2008
year-end accounts by mid April.

‘However, there is still a lot of financial stress on companies across the
public and private sectors and anecdotal evidence suggests we will see further
emphasis of matter arise, as companies continue to file their 2008 year-end

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