Legal negligence claims against the Big Four firms threaten to decrease that number to the Big Three or less, according to David Devlin, President of the European Federation of Accountants. With that concern, Devlin is leading a charge to lobby the European Union for caps on claims against accounting firms, according to an article in this week's Financial Times.
The model for the liability cap should be a multiple of a firm's audit fees, according to Mr. Devlin, who is also a partner at PricewaterhouseCoopers. "It would be helpful at a European level to recognize there is a serious problem of rapidly escalating major claims that are very difficult if not impossible to insure against," said Mr. Devlin.
The European Commission is due to issue a new auditing strategy later this spring. The question of coupling liability reform with audit reform is a touchy one because of the damaged reputation of the accounting profession and concern about a possible dual message being sent to the public about enforcement of new reforms.
The European Commission is also trying to position itself as an organization capable of fully regulating accounting firms under its jurisdiction. The Sarbanes-Oxley Act gives US regulators the ability to monitor and regulate the activities of European accounting firms who perform work on US companies or US affiliates. If European accounting firms are subject to oversight by both the European Commission and US regulators as prescribed by Sarbanes-Oxley, higher audit fees will be the result, according to Devlin.
The auditing strategy due in April or May will consider both liability reform as well as reforms to improve the regulation of accounting firms within the European Union.