Another one bites the dust.

The whining from auditors about getting liability caps is likely to get louder with news that troubled US mortgage finance company Fannie Mae is suing former auditor KPMG for $2 billion.

Fannie Mae's financial woes surfaced this year, some of which I covered some in this blog entry here. Now, Fannie Mae says KPMG failed to serve its role as an independent watchdog and prevent $6.3 billion in accounting errors.

Suing KPMG for $2 billion is ambitious. That's close to 12 per cent of KPMG's revenues for the year to September 2006.

The lawsuit will result in the accounting world rallying behind the push for liability caps which already seems to be gathering momentum. Significantly, the Hank Paulson-backed Committee On Capital Markets Regulation report has argued that we need liability caps to avoid another Andersen:

"We believe Congress needs to address these serious matters by carefully examining the case for caps on liability or safe harbors to prevent the failure of another auditing firm, while at the same time providing that responsible individuals are held fully accountable."

That comes after the publication of a research paper in Europe in September which argued that an Arthur Andersen style action against one of the big four - KPMG, Ernst & Young, PwC and Deloitte - could pose a threat to financial stability of the wider economy.

In other words, Fannie Mae might have just given some ammunition to the forces wanting to reduce the accountability of auditors.