Liability caps ahead
Filed in archive Accounting by leon on January 25, 2007

Back towards the end of last year, I did a blog entry on a push in Europe to provide auditors with the protection of liability caps.
Then the interim report of Hank Paulson's boys on the Committee on Capital Market Regulation called on Congress to seriously examine capping auditor liability and other safe harbours.
Now the push for caps is gaining momentum with the European Commission releasing a working paper on the issue.
The working paper puts up four proposals:
1. A flat European-wide monetary cap.
2. A cap determined by the size of the listed company being audited.
3. A cap determined by the level of audit fees charged by the auditor to its client.
4. Proportionate liability, where each party is liable for that part of the loss that corresponds to their area of responsibility.
Each of these is problematic. How for example do you set a European-wide cap without disadvantaging mid-tier and smaller firms? What determines company size? Turnover? Profitability? Market capitalisation?
The working paper, combined with the US committee's recommendation, suggest that liability caps might be just a matter of time. A global economy and the spread of multinationals ensures that liability caps introduced in one jurisdiction
will inevitably flow into others. In other words, if it happens in Europe first, the US will follow and vice versa.There is a touch of irony here. Revenues at the Big Four - PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG - have been growing at double digit levels. The audit firms are raking it in with audit fees soaring and regulatory overhauls enacted in the wake of accounting scandals earlier this decade creating new work for firms. Indeed, the accountants are now complaining that their biggest problems is a lack of staff to meet the huge demand for services. So is it any wonder the public has little regard for the Big Four wanting to limit court damages?
The bottom line is that auditors need to be held to a high standard. Those are the gatekeepers investors rely on and yes, it's a hard job but hey, that's what they're getting paid for. If liability caps come in, then the fees should come down because there would be less risk in the job.
And of course, none of this has anything to do with the shareholder.
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Mr Wong
