Auditors' liability

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Deloitte Slovenia
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The European Commission has published an independent study on the economic impact of current EU rules on auditors' liability regimes and on insurance conditions in Member States, which reveals that major reform on auditors' liability is inevitable.

The London economics study represents the first EU-wide scale economic study on this subject. It analyses the structure of the auditing market and its possible development in the future, describes the existing limitations in the insurance market for international audits and examines the economic needs for limiting auditors' liability.

Internal Market and Services Commissioner Charlie McCreevy said: "This study provides valuable input into our examination of auditors' liability. It highlights that large claims may put at risk an entire auditing network. There are important issues at stake. I recognise opinions are divided about how we should address these.  I hope the discussion that this report will engender will allow us to reach a clearer understanding of how best to address the real problems that are there and will not go away. Given the important role auditing companies play in our capital markets, we will soon present our views on possible ways forward for further discussion."

One of the key conclusions of the study is that  the international market for statutory audits of large and very large companies is highly concentrated and dominated by the Big 4 networks, with the likelihood of new entrants dropping in the coming years.

The level of auditor liability insurance available for higher limits has fallen sharply in recent years. The failure of a network, which is a very real possibility with the unlimited and uninsurable liability that exists in many Member states, could lead to difficult consequences for the wider economy like a significant reduction in large company statutory audit capacity possibly creating serious problems for companies whose financial statements need to be audited. A limitation on auditor liability would reduce this risk.

“Possible collapse of a Big Four company would destabilize the entire audit market, making it even harder for small and middle-tier forms to compete with the big audit firms. We could even face a situation when none of the audit firms would be willing to audit certain high-risk industries, e.g. financial intermediaries,” points out Yuri Sidorovich, Partner in charge of Deloitte Slovenia. “Reform is not needed because auditors want to avoid their responsibility but simply because they cannot and should not be expected to act as underwriters for the world’s financial markets.”

More information is available at:
http://ec.europa.eu/internal_market/auditing/index_en.htm

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