European Commission Dashes Hopes For Audit Liability Caps

With a declaration that unlimited liability on auditors is a "quality driver," the European Commission has all but closed the door on any discussion of limiting the size of lawsuits that can be levied against accounting firms that perform public audits.

Last month, AccountingWEB reported that a move was on to lobby the European Commission - the executive arm of the European Union - to cap the legal liability of auditing firms.

But in a glaring setback for any such lobbying efforts, EU's Internal Market Commissioner Frits Bolkestein said in a speech at a financial conference in London on March 24 that unlimited liability exposure was a catalyst for quality work: "After so many major financial reporting scandals and potential audit failures, regulators need to act to restore investor confidence... An intervention limiting liability, to my mind, would not serve to revive the trust of investors..... Third parties should be able to rely on the correctness of companies' financial statements and be in a position to claim damages in case of fraudulent financial reporting," he said.

Mr. Bolkestein laid out four reasons not to cap auditor liability:

  • Unlimited auditor liability is a quality driver
  • Liability systems exist for the protection of the persons who suffered damage not for the convenience of those who may be at fault
  • Increased auditor liability is partly a self-created problem
  • Audit is by its very nature a function which is carried out in the public interest. This implies that 3rd parties should be able to rely on the correctness of companies' financial statements and be in a position to claim damages in case of fraudulent financial reporting.

Reacting to those comments was Neil Lerner, global head of regulatory matters at KPMG, expressing disappointment with Mr. Bolkestein's comments. "There is a genuine risk of the Big Four becoming a Big Three or fewer if there is not concerted action by governments around the world to introduce liability capping," said Lerner.

The European Commission is due to issue an audit strategy within the next 4-6 weeks to address corporate governance issues and to improve the regulation of accounting firms within the European Union.

Read Mr. Bolkestein's entire speech.

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