An insurance leader has warned that a Europe-wide auditor
liability cap will not lead to cheaper insurance for firms and
could weaken the credibility of audit reports in the case of
litigation.

The European Commission last month fanned the auditor liability
debate by recommending member states adopt a proposed model to cap
liability.

The recommendation, which was largely welcomed by the accounting
profession, has come under attack by the European insurance and
reinsurance federation (Comité Européen des Assurances – CEA).
CEA’s vice president Gérard de la Martinière told the
International Accounting Bulletin liability caps would
create an artificial imbalance between the liability of auditors
and unlimited liability of management. “I think that interfering
with normal functioning of the insurance market, which would be the
case with the regulatory cap of liability, would deprive the
society of knowledge to what extent there is something going wrong,
[affecting] the way litigation may be developed,” de la Martinière
said.

He said that he has seen no evidence of a lack of insurance
coverage for audit firms, and believes auditors: “do not like to
pay too much to get this coverage [but] claim that they need a cap
to limit their spending”.

David Radley-Searle, a partner and director of the International
Business Centre at Grant Thornton Audihispana, the network’s
Spanish member firm, believes there is ample evidence insurance
premiums have risen in recent years and that limiting liability
should provide some relief to the cost of coverage. “We have seen
now clear signals in Spain that a limitation of liability would
give rise in the short-time to lower premiums or better thought out
insurance cover,” he said.

Radley-Searle said liability caps could benefit the insurance
industry by allowing more players to enter the audit firm
market.

Breaking down barriers

Radley-Searle stressed that limiting liability will benefit the
mid-tier to a degree, as unlimited liability is a market entry
barrier when pitching to larger quoted companies, but it would not
influence the type of work or strategy firm’s pursues.

Out of the three models presented by the EC – applying a
liability cap, introducing proportionate liability or allowing
liability to be limited by contract – Grant Thornton Audihispana
prefers a model of proportionate liability where any damages should
be proportional to the damage that has been caused.

de la Martinière, who is against any type of cap, admitted steps
should be taken to restrict the liability placed on auditors, which
has spiralled out of control in recent years as regulators imposed
more rules and responsibilities on auditors in the wake of
corporate failures like Enron. He called for an international, and
not European, approach to liability reform and said he believes
legislators need to revise the scope of the auditor’s role and
strip back certain functions and responsibilities.

de la Martinière said there could be professional resistance to
reducing the responsibility of the auditor’s role because when it
was expanded it meant: “more fees, but on the other hand they do
not like the liability which is associated to this extension of
their role”.

■ LIABILITY CAPS
Choosing the right
model

The European Commission has proposed member states follow one or
more of the following methods:

(a) Establishment of a maximum financial amount or of a formula
allowing for the calculation of such an amount;

(b) Establishment of a set of principles by virtue of which a
statutory auditor or an audit firm is not liable beyond its actual
contribution to the loss suffered by a claimant and is accordingly
not jointly and severally liable with other wrongdoers; and/or,

(c) Provision allowing any company to be audited and the
statutory auditor or audit firm to determine a limitation of
liability in an agreement.

Source: European Commission

Arvind Hickman