Auditors in the US have issued a stern warning to the US Treasury that
sufficient steps are not being taken to avert the risk of catastrophic
litigation destroying the profession.
Cynthia Fornelli, director for the
Centre for Audit Quality
(CAQ) which has a membership of about 800 audit firms said that proposals
Treasury’s Advisory Committee on the Auditing Profession, to improve the
profession’s service to the capital markets, did not contain ‘even the limited
litigation reforms discussed’.
‘These ideas include appeal bond caps, appeals of denials of motions to
dismiss, strengthened bankruptcy defenses… and most importantly, a liability
caps system for audit firms,’ Fornelli wrote.
CAQ’s frustration with the US Treasury for ignoring the liability reforms
sought by the profession comes amid delicate discussions in a similar vein
between the UK’s Financial
Reporting Council (FRC) and the
Securities and Exchange
FRC chairman Paul Boyle is currently lobbying SEC chairman Christopher Cox to
back the UK’s limited liability arrangements, now in law. If the SEC does not
accept the UK’s arrangements, then audit firms in the UK with US-listed
clients will also be prevented from entering into limited liability
While the sentiments from the CAQ are not new to the Treasury committee, led
by former SEC chairman Arthur Levitt, they are forthright in their accusation
that the profession’s concerns have been ignored.
Fornelli warned further: ‘If this liability concern is not addressed, many of
the committee’s other recommendations will prove unworkable due to the current
litigation context. And as we pointed out in our first letter, we believe that
fulfilling the committee’s mandate to address “the sustainability of the public
company auditing profession” includes meaningfully tackling this issue.
‘We fear that the committee may be swayed to inaction by arguments that link
high audit quality to auditor liability and the notion that massive litigation
exposure is in some way beneficial to the profession and to the capital markets
If US firms want to gain support for limiting liability, they should
reconsider their reluctance to publish their financial statements, says UK
regulatory chief Paul Boyle.
The FRC chairman made the comments on the back of warnings from CAQ that
firms could fail from catastrophic litigation. But this was also coupled with
CAQ’s support for filing financial statements only on a confidential basis to
the US audit oversight board.
‘One of the points it [the CAQ] is arguing is that firms should not publish
their financial statements. There is a link here, which they [members] might
want to think about, between them not wanting to publish these statements and
the lack of support for limiting liability.
‘There are still people who say the firms are exaggerating the true scale of
liability risk,’ said Boyle.
Boyle said UK firms generally had higher levels of transparency than their US
counterparts, which contributed to securing more support for limiting their
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