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Auditors' liability

It seems as if the auditors' tasks would be misinterpreted by the public and very often even by the companies employing them. Auditors are not responsible for the financial statements of a company or for any parts thereof, but they are fully responsible for the report prepared on the financial statements. In most cases, when a large company employing an auditor goes bankrupt, the auditor is also involved in the procedure in spite of the fact that he/she is not responsible for the company's activities. In case of bankruptcy all investors wish to get their money back, whereas the only person who has money around the company going bankrupt is the auditor. The auditors' liability first entered the focus of attention in relation to the large-scale corruption discovered at Enron and WorldCom. The scandal around the dissolution of the companies found guilty also affected Arthur Andersen, one of the world's best known auditing and consulting companies, thus reducing Big5 to Big4.

The European Union called for an open consultation in January in relation to the potential modification of the regulations related to the auditors' liability. The aim is to "save" the profession from excessive liability for damages.

An independent study prepared by London Economics at the request of the European Commission summarized the auditors' liability and the impact of the community regulations related to the conditions of liability insurance in the member states. The study, which was published in October, highlights that the current regulations related to liability involve system risk and predicts that within five years after Arthur Andersen's downfall due to the Enron scandal, another Big4 will follow the same fate as AA. Such an event would have unpredictable consequences on world economy and on the stock markets. It would probably result in capacity gap and in the considerable increase of the service prices, due to which large companies may not be able to comply with their reporting requirements. The situation would shake the investors' confidence and would probably cause the dissolution of further audit firms.

The Commission presented four options to the member states on the basis of the London Economics study: According to the first option, there would be one single monetary cap with respect to the indemnification payable by auditors (there is such a cap in 5 member states: it is EUR 12 million in Belgium and Austria, EUR 4 million in Germany, and EUR 150 thousand in Slovenia; according to the Greek regulation, the cap corresponds to either a year's audit fee or to five times the salary of the head of the supreme court). According to the second option, the cap would depend on the audited company's size (as measured by its market capitalization). In the third option, the cap would be a multiple of the audit fees charged to the company. The fourth option follows the principle of proportionate liability, which means that each party is liable only for the portion of loss that corresponds to the party's degree of responsibility.
It is possible that Brussels will not enact a law the scope of which applies to all member states but will leave it to the member states to define the means and extent of restricting the liability. Our experts do not know about plans in Hungary to limit the auditors' liability.

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