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November 19, 2008

Sweden proposes SEK100 million auditor liability cap

Sweden may soon join Germany, Belgium and several other European member states in introducing a cap on auditor liability, a move that an industry figure said could open up the audit market for mid-tier firms.

After an extensive investigation, a proposal has been put before the Swedish government recommending a cap of SEK100 million ($12.5 million) be put in place.

Dan Brännström, secretary general of Swedish professional services institute FAR SRS, told the International Accounting Bulletin that if the proposal is passed it could be an effective way to open up the audit market.

“It is high time to introduce limited liability for the Swedish auditor,” he said. “Today only very few audit firms have the capacity to audit listed companies. The Big Four global audit firms dominate this market segment in a number of countries and the existing liability renders the growth of additional global audit firms more or less impossible. It is important to have competition and choice in this market but it will take time before you see the mid-tier firms become as big as the Big Four firms.”

Brännström said the auditor liability issue was brought to the attention of the Swedish government two years prior to the European Commission’s recommendation this June that member states consider limiting auditor liability.

“With the backing of the big firms, the institute asked the government to study how to limit auditor liability because of the problems to get proper insurance for the auditors,” Brännström explained.

“But Sweden’s decision was certainly helped along by the EC’s recommendation in this field and it came at the right time,” he added.

Brännström said the proposed SEK100 million cap is a large amount. In Germany the limit for unlisted companies is €1 million ($1.27 million) and for listed companies it is €4 million.

But he noted that it is better to have a large cap than none at all.

Grant Thornton Sweden chief executive Peter Bodin agreed the current proposal is a good start.

“Of course if I had been asked I would have said it should have been lower, perhaps at the levels they have in the German market, which are good levels, but you have to start somewhere and this is a good start,” he said.

The Swedish limitation proposal is a combination of a cap and proportionate liability. Brännström said the proposal states the board of directors has the primary responsibility for financial reporting.

“So if a bank or someone wants to make a claim, then they have to address it to the board of directors first of all. Then the board of directors can forward the claim to the auditor,” Brännström added. “I think they chose that model because it is good to have a cap solution as part of the complete solution. A cap is very clear and it is easy for the stakeholders to understand and react to.”

Bodin said firms will have to invest in good quality people if the market is to open more for the mid-tier, otherwise the limitation of liability for auditors will make no difference.

“Grant Thornton Sweden has invested a lot to take market share and of course this reform will help us to achieve that goal. I think it is a positive change for us and the whole of the Swedish market but we also have to build our capabilities,” he concluded.

If passed by parliament, the Swedish liability cap should come in to effect in 2010.

Nicola Maher

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