PracticeAuditOn auditors liablity

On auditors liablity

Eight years ago one of our senior partners was engaged in a debate on auditor liability and became frustrated at the lack of acceptance of the seriousness of the case for change. His response was 'so what you are saying is that you have to see a body before you will do anything'.

Well we can all see a body now.

The capital markets cannot afford to have another major firm destroyed by the backwash of a corporate collapse. Neither can we risk a large firm withdrawing from the audit market because the rewards don’t justify the risks.

The insurance market took its own view a long time ago. For some time it has been impossible for the large firms to get adequate insurance cover.

I dread to think what the premium would be for full liability cover today if anyone were prepared to underwrite the risk.

Well before the Enron crisis we were declining to act or resigning audits because our risk assessment was too high. We are likely to be even more discriminating in future.

Some may consider that a good thing because if a company struggles to find reputable auditors it might be more inclined to deal with the issues that create the unacceptable risk.

Others would say it ‘s not in the public interest for auditors to walk away. What if a whole market sector was assessed as too risky?

It may not be a hypothetical question much longer. One answer may be audit pricing. While the market may accept the justification for some level of increase, I cannot see it being prepared to bear huge increases in fees to cover the increased ‘insurance premium’.

The problem will not be solved without addressing auditor liability.

Only if auditors’ liability can be capped at a realistic level or proportionate liability applied will the balance be redressed.

It would also have the benefit that auditors would be more prepared to extend the scope of their reporting beyond the statutory financial statements, providing more useful information for investors.

And remember this changes nothing for anyone who has committed a criminal act. They will be just as liable for their transgressions as they should be. The real issue is whether it is fair that thousands of innocent people could lose their livelihoods as a result of an incompetent piece of work.

They may not be prepared to take the risk.

  • Rodger Hughes is head of assurance and business advisory services at PricewaterhouseCoopers.

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