Analysis: Auditor protection on the cards.

Link: Wyman calls for liability cap

But it looks like a cap – or, as ICAEW president Peter Wyman has recently argued, a ceiling – on auditors’ liability is on the way. This will leave many auditors heaving a sigh of relief. Who could have failed to notice the potentially firm-crushing #2.6bn claim made against Ernst & Young by Equitable Life? Most of this claim was recently thrown out of court but is apparently going through the appeals court. Or the new lawsuits against Deloitte & Touche in the US over accounting irregularities at Ahold? Or the threat to sue KPMG over Independent Insurance? The list continues. The fact is, if things go wrong, the people left standing with the deepest pockets are the auditors. This was emphasised recently by the Bannerman case in the Scottish courts. In a move that left institutes and Big Four auditors open-mouthed with shock, a judge ruled that auditors have a duty of care to third-party users of audit reports – in this case, the Royal Bank of Scotland who used an audit as the basis for a loan decision. The ruling sent firms rushing to add disclaimers to their reports in a bid to discourage further claims. After Enron, Equitable Life and now Bannerman, it looks like open season on auditors. So auditors want more protection; a limit to just how much should be claimed. Of course they want personal protection, because in an accounting firm it is the partners who are personally liable for their firm’s cock-ups. They are also liable for their fellow partners’ mistakes and for the errors of other staff, such as directors. But those in the profession with influence recognise that you don’t get something for nothing, hence there is an attempt to bargain for a cap. Enter Peter Wyman, ICAEW president, to lead the way again. Throughout last year, he was at the heart of the DTI’s review into audit and accountancy regulation. He has had time to persuade departmental officials and governments ministers, such as the trade secretary herself, Patricia Hewitt. Now he’s publicly offered for auditors to take on more responsibility in return for more protection. Last Friday, he said: ‘I am not suggesting auditors should be able to walk away unharmed. They must have a proper responsibility for their own actions. Nor am I suggesting this reform should come free. I would expect a reasonable extension of both the areas within a company’s annual report over which auditors should accept responsibility, and that auditors should accept a duty of care to a wider group of people than under the current law.’ Conservatives in the profession may rail against this offer. Detractors will ask why Wyman isn’t just seeking protection, instead of offering the profession up for a further burden? But events are already in motion. As Accountancy Age reported last week, Patricia Hewitt revealed that the DTI has ‘detailed proposals’ underway. We’ve yet to see what form they might take, though we might know by as early as next month. But the move does indicate that extra responsibilities are on the way in exchange for the protection. If the DTI goes for the ‘proportionate liability’ option, expect prolonged wrangling over where the lines are drawn. Picking a cap level could be an easier issue to settle. And the goverment’s motive? The last thing it wants is for a Big Four to become a Big Three.