Audit Industry Reform Needs Switch in Liability, ACCA Says

Michelle Remo, “Big 4″ observer
June 19, 2011 /

The Association of Chartered Certified Accountants (ACCA) has said the audit industry needs to replace joint and several liability with proportionate liability to enable reform in the sector.

According to the ACCA, if audit is to respond effectively to criticisms made after the financial crisis in 2008, rules governing the auditors’ liability will need an overhaul, citing a new study.

The ACCA argued that such results can only be achieved “with a corresponding reform of audit liability to encourage auditors to take on more responsibilities and protect smaller audit firms looking to enter the market,” especially that regulators are calling for tighter competition among auditors and seeking to expand their role.

In a statement, John Davies, ACCA’s head of technical, said that “since the financial crisis, several studies have revealed consistent high levels of support for audit amongst stakeholders.”

“Calls for more competition and a broader scope of inquiry for auditors, supported by ACCA, must recognise the cost implications of conducting extra work, extra training, and the increased liability exposure for both established and challenging firms,” he added.

“In many countries, liability arrangements continue to be structured along the lines of joint and several liability,” the ACCA said in an email.

“Where a client suffers a loss due to the actions of more than one party, they may sue one or all of the other parties for the full set of damages claimed. This has led to the ‘deep pockets syndrome’ where the audit firm – if it is partly at fault – is singled out amongst other defendants because they are known to carry substantial amounts of professional indemnity insurance.”

“The adoption of broader responsibilities for auditors risks complicating existing legal assumptions as to their duty of care and increase their exposure”, said Davies.

“The reform agenda, which we support,” Davies continued, “needs to recognise this risk of exposing auditors to unreasonable levels of liability and prohibitive insurance costs.”

“If we want more competition amongst audit firms, and a model of audit that better meets stakeholder needs, then we need to consider replacing joint and several liability with proportionate liability as other countries have done,” he said.

The UK Government has already allowed auditors to limit their liability but its most recent initiative has so far failed to attract widespread support, according to the ACCA.

As in Australia, the more radical option of proportionate liability sees the auditor responsible for only the damages directly caused by their own actions or negligence.

“Such a system is considered preferable to solutions such as statutory liability caps, which break the responsibility link and would be unfair to wronged clients,” the ACCA noted.

“It’s in everyone’s interest to see audit strengthened. Stakeholders say they want a wider remit and, in principle, auditors are ready to accept it. Liability reform must be seen as a necessary tool to help make this happen,” Davies concluded.

 

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