EC urges greater auditor competition

Brussels has made far reaching proposals to the sums investors can claim from
auditors, in a bid to prevent protracted lawsuits from crippling global
accounting firms servicing FTSE 100 companies and other big international

The report also encourages market participants to refrain from placing
hurdles in the way of smaller mid-tier companies seeking to enter the market for
big audits.

In October last year, the internal markets office of the European Commission
published an economic impact study prepared by an external consultant, London

The latest ideas from Europe are in line with that report and propose a
number of options. These include: the introduction of a fixed monetary cap at
European level; a cap based on the size of the audited company; the introduction
of a cap based on a multiple of the audit fees charged by an auditor to its
client; and the introduction by member states of the principle of proportionate

Nick Heaton, a partner at law firm Lovells, said it was encouraging to see
the liability limit emerging from Europe.

‘But these suggestions are not surprising as they are built on the London
Economics report.

‘Nevertheless, it is an important step in the debate, to see this suggested
by Brussels,’ said Heaton.

But he added: ‘In terms of the four proposals, what is surprising is that
they’ve not added the UK solution – of negotiation and contract between firm and
client over what the firm can be held responsible for.

‘They don’t really suggest that you could adopt other ways of limiting
liability through contractual agreements, which is where we’ve got to in the UK
now,’ said Heaton.

EU internal market commissioner Charlie McCreevy said that: ‘Given the
differences between national markets, there is probably no one-size-fits-all
approach. I want to ensure a thorough debate on the possible ways forward, and I
encourage interested parties to give us their view.’

The EC has invited stakeholders to give their views on the issues involved by
15 March 2007.

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