Marcus Aurelius (Roman emperor, best known for his Meditations on Stoic philosophy, AD 121-180)
On June 6, 2008, the European Commission published a recommendation calling for EU Member States to develop liability caps for auditors, or permit listed companies to develop such caps in consultation with their shareholders and governing boards, subject to judicial review and disclosure. These caps would pertain to statutory audits of listed companies.
Edith Orenstein at the FEI Blog gives her usual thorough and super-informative summary of the situation in Europe and the reaction and related activities in the US. I would strongly encourage you to go to the FEI Blog and to Jennifer Hughes’ article in FT for the details. Given my exhaustive coverage of this issue here in the past and my well known views on the subject, I will only comment, out of context, to a few of the quotes in Edith’s report.
The EC explains in this Frequently Asked Questions (FAQ) document: “It is in the public interest to ensure sustainable audit capacities and a competitive market for audit firms at international level… liability risks arising from the increasing litigation trend combined with insufficient insurance cover may deter auditors from providing audit services for listed companies. If these structural obstacles (liability risks/lack of insurance) persist, mid-tier audit firms are unlikely to become a major alternative to the ‘Big 4’ audit networks on European capital markets… there is also a risk of losing some of the existing players. One of the reasons might be that catastrophic claims cause the collapse of one of the major audit networks.”
In related news, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP) voted on June 3 to formally publish in the Federal Register – and seek public comment on – an Addendum to its May 5 Draft Report…
The Addendum includes one recommendation and three matters for further consideration,
(1) a recommendation that the PCAOB reconsider the form and content of the auditor’s report,
(2) whether engagement partners (not just the ‘firm’) should sign audit reports,
(3) whether audit firms should be required to make public a set of audited financial statements for their own firm,
PwC General Counsel Charles W. Gerdts III (testimony) and attorney Michael R. Young of Willkie, Farr & Gallagher (testimony), explained that the threat of catastrophic loss limited audit firms’ abilities to exercise their right to take the matter to trial, instead having no real choice but to settle, rather than – as Oberly soberly put it – ‘bet the firm.’