The risk of ruinous law suits has been demonstrated with cases such as Arthur Andersen that collapsed in 2002 in the aftermath of the Enron scandal.
The study by London Economics argues, that a similar blow to one of the four dominant accounting firms (KPMG, Ernst & Young, PwC and Deloitte) could pose a threat to financial stability of the wider economy, creating “serious problems for companies whose financial statements need to be audited”. The study states that “one of the major Big Four networks could possibly fail” and that “a limitation on auditor liability would reduce risk caused by potential catastrophic claims.”
Internal Market and Services Commissioner Charlie McCreevy said: “The study highlights that large claims may put at risk an entire auditing network.” He added: “I recognise opinions are divided about how we should address these.”
The controversial issue of limiting auditors' liability had been excluded from the Commission's earlier directive of May 2006. Some see unlimited liability as an important incentive for rigorous auditing and warn that a limit to liabilities could encourage complacency.
As limitations on auditor’s liability already exist in some member states (Austria, Belgium, Germany, Greece, Slovenia and currently discussed in the UK) and in view of the different circumstances, the study states that it is “unlikely that a one-size-fits-all EU-wide approach is the most useful”.
The Commission is to issue a report on auditor liability based on this study before the end of 2006 and will invite stakeholders to giver their views.
