Audit giants press MEPs for financial liability cap

By Peter Chapman

Date: 23/09/04

GLOBAL auditing giants are pressing MEPs and governments to give them a bankruptcy safety-net, European Voice has learned.

Without limits on their financial liability the industry warns that the collapse of Arthur Andersen in the wake of the Enron affair could easily be repeated - whenever another auditor fails to spot a financial scandal involving its clients.

The demise of another big auditor, they warn, would create a near monopoly in the market for big company audits and related services - already dominated by the so-called big four - PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG.

The issue is top priority for the "European Contact Group" of audit firms, which includes the "big four" and medium-sized firms BDO and Grant Thornton, one of the firms implicated in the meltdown of Italian milk company Parmalat.

The group's chairman Jeremy Jennings said the firms were calling for a cap on their financial liability to be grafted into recent European Commission proposals amending the eighth company law directive - which governs the role of the audit profession.

"We want to see it on the European agenda," said Jennings, a partner at Ernst & Young, adding that a cap would counterbalance other measures in the draft law that increase the responsibilities of the firms in overall charge of group audits.

Firms specifically want EU legislators to limit their liabilities to a "multiple of the fees" that they receive from audit work, said the former Andersen accountant.

Ideally, he said firms would also like member states to make auditors' financial liability proportionate to their level of "guilt" decided by the courts - for example when one of their client companies collapses and the auditor is the only target for creditors.

"If you are only 15% culpable it does not seem right that the only one left standing, the auditor, picks up 100% [of the liability]."

But Jennings said these changes would be difficult to enact at EU level.

In the meantime, firms find it impossible to get "catastrophic insurance cover" for potential losses from law-suits.

The lack of insurance makes it more likely that firms will collapse - and also acts as a disincentive for smaller companies to enter the audit market.

The Contact Group, set up in 1993 at the behest of the European Commission, met some MEPs at Strasbourg last week. The assembly will in the coming weeks discuss amendments to the directive.

MEPs indicated that they have yet to make up their minds on the issue. But Frits Bolkestein, the commissioner responsible for the audit proposals, is opposed to the introduction of a liability cap.

He shocked the industry during a conference last year by insisting that unlimited liability would discipline auditors and guarantee better performance in the wake of a spate of corporate scandals, including the Enron and Parmalat affairs and the near collapse of Dutch supermarket chain Ahold.

Firms have also pressed diplomats to raise the issue in the Council of Ministers. Following a request from Belgium, Spain and Italy, liability is expected to be discussed at a meeting on the 8th directive today (23 September).

Global auditing giants are reported to lobby MEPs and governments to give them a bankruptcy safety-net when amending the eighth Company law directive which governs the role of the audit profession. Without limits on their financial liability the industry warns that the collapse of Arthur Andersen in the wake of the Enron affair could easily be repeated - whenever another auditor fails to spot a financial scandal involving its clients.