The Debate – Is there a need to limit liability?

Outrageous calls for a limit

By Jim Cousins

Taking advantage of the government’s company law review, the Big Four have been arguing for a cap on their currently unlimited liability.

I strongly believe the government should not give into to the overbearing might of the Big Four, which is purely based on naked self-interest.

They argue that having a cap on liabilities is in the public interest.

This is nonsense. They say there is a real danger that, without reform and, as the result of a crippling lawsuit, the Big Four could become the Big Three, which would have a damaging effect upon competition.

The Big Four currently audit some 98% of the FTSE350 companies – all bar eight of the top 250 and all of the top 100. This does not look like a perfect marketplace to me. A more accurate conclusion is that the Big Four have a stranglehold in the marketplace that bars access to smaller firms with the capacity to audit large companies.

Besides, no major auditing firm has collapsed because of unlimited liability.

Andersen’s demise was due to a number of factors, including management failings, which resulted in a loss of confidence and reputation. Liability reform would not have protected the firm from these factors.

The danger is that, by introducing a liability cap, the government would be accepting that they need to be protected from the consequences of any of their actions that might endanger their existence. This cannot be justified.

The Big Four also argue that without a liability cap, one of them could withdraw from auditing because the balance between risk and reward is unsustainable. Let the government call their bluff. Smaller auditing firms have already said they would be willing to ‘step up to the plate’.

If the partners of the Big Four want to turn their backs on the lucrative rewards currently available to them, so be it. But they should not expect to have those great rewards virtually guaranteed without any risk attached.

The government has already given auditors in partnerships protection from personal unlimited liability. To add the cap on liability would simply goldplate that protection.

  • Jim Cousins MP is a member of the Treasury select committee.

Capless, we are left exposed
By Peter Wyman

Can you name any profession or business that is required to accept unlimited liability, both for its own mistakes and those of others? If, like me, your only answer is ‘auditors’ then you probably already understand why reform is necessary.

I should make it clear that auditors are not seeking to be absolved from responsibility for their work. Quite the opposite – we do expect to be liable for our own mistakes. But asking us to be liable for the negligent or fraudulent acts of others too is unfair and probably unsustainable.

Calculated risk taking is at the heart of capitalism. This means that, from time to time, a company will fail often because of changing market conditions, poor strategic planning or occasionally fraud. Judgments are at the heart of financial reporting and auditing, and these are made by individuals.

No system based on the exercise of professional judgment is infallible, however robust the processes and controls we put in place. It is therefore only a matter of time before a company collapses and the auditors are sued for more than they are able to pay, given joint and several liability.

Surviving firms would retreat from high-risk situations fast, leaving whole sectors unable to obtain appropriate auditors. Many commentators already believe there is insufficient choice – reducing the number of firms further would cause a real problem.

While the UK profession is in better shape than its counterparts in much of the rest of the world, there are signs that the prospect of unlimited liability is beginning to influence career choices. The notion that the threat of unlimited liability keeps these professionals on their toes is, quite frankly, ludicrous.

There are a number of ways in which reform could be fashioned to minimise these risks while still leaving auditors accepting a high degree of responsibility.

Proportionality would mean auditors retain full liability for their actions.

Some form of financial limit, set at appropriate levels, would be a reasonable alternative. But whatever we do needs to be done before it is too late.

There is no plan B.

  • Peter Wyman is head of professional affairs at PricewaterhouseCoopers.

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