The United Kingdom has rejected a proposal to place a cap on the liability auditors face when a company goes under.
The decision, by the UK's Department of Trade and Industry, struck a blow to the Big Four's hopes that the UK would agree to the cap and spur other European countries to follow.
Jeremy Jennings, global director of regulatory and government relations for Ernst & Young Global in Brussels, told the Wall Street Journal: "It is doubtful whether the EU will conclude there is a need for change when one large member state has decided there is not.”
The Big Four - PricewaterhouseCoopers, KPMG, Deloitte & Touche and Ernst & Young - have already given up on campaigning for liability caps in the U.S., considering how politically unpopular such proposed legislation would be.
The firms potentially face millions or even billions of dollars in potential liabilities when big companies implode. In just one example, now-bankrupt Parmalat SpA in Italy is suing Deloitte & Touche and Grant Thornton for at least $10 billion.
According to the newspaper, the Big Four say a large claim could bankrupt one of them leaving fewer firms to audit large public companies. "Any delay in reform is dangerous for us," said Peter Wyman, head of professional affairs for PricewaterhouseCoopers LLP in the UK.
Some reform may be on its way. The Department of Trade and Industry said in a statement to the UK Parliament that it may allow the firms to negotiate “proportional” liability caps with the companies they audit. Under this arrangement, a firm would be held liable only for damages that a court determines were specifically caused by the firm.
Denmark and Spain allow firms to negotiate liability caps with the companies they audit, while Germany and Greece have already enacted caps on auditor liability.
"Our view is that to be safe from catastrophic liability, we would need an outright cap, but we would be a million times better off even with just a proportionate cap," Wyman said.