MEPs join auditors’ campaign for financial liability lifeline

Date: 25/11/04

By Peter Chapman

GLOBAL auditing giants are winning support from senior MEPs for a bankruptcy safety net, European Voice has learned.

Without limits on their financial liability the industry has warned 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, firms 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.

EU governments have so far refused to agree on liability during discussions on a new auditing directive.

But MEPs, who began to examine the 8th company law directive this week, indicated that they could be warming to the idea of handing auditors a liability lifeline.

German Liberal Wolf Klinz, rapporteur on the European Parliament's economic and monetary affairs committee, said that the draft law could be amended to include a 'maximum liability range' of between 10-25 million euros.

“We should not run into a situation where a liability case could ruin whole firms - and allow three, two or even one auditor to have a monopoly,” he declared.

“We need a liability. But it should be a liability that will still be insured at acceptable rates. If you set the liability cap at 100m euros, it would be uninsurable.”

Germany already has a 4m euros cap on liability, but Klinz said this was too little. He said many other MEPs had indicated that they shared his view.

Theresa Villiers, a British Conservative, said that she “would have no objections in principle” to an overall liability cap.

But she added that firms ought to be allowed to set liability levels in contracts with their corporate clients, in case companies face legal problems from items that should have been uncovered in audits.

This would be separate from any liabilities stemming from third-party claims, for example from aggrieved shareholders.

Bert Doorn, a Dutch centre-right MEP, who will be steering the issue in the legal affairs committee, also refused to rule out a liability cap, though he said he wanted to consult other deputies before deciding.

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

Audit firms are reluctant to speak on such a sensitive issue. But the contact group has argued that a cap would counterbalance other measures in the draft law that increase the responsibility of the firms in overall charge of group audits and clamp down on their ability to offer services, such as tax consultancy to clients.

They want EU legislators to limit their liabilities to a “multiple of the fees” that they receive from audit work.

The big four would also like member states to make auditors' financial liability proportionate to their level of 'guilt' decided by the courts.

But audit bosses admit that these changes would be difficult to enact at EU level.

Henri Olivier, secretary-general of the European Federation of Accountants, warned MEPs not to push member states too hard on the liability issue, for fear of a backlash from countries such as Britain that do not have a limit.

He said that it would be better to include a suggestion that they limit liability in the directive, rather than a demand.

“That is too far and will never succeed,” Olivier warned.

Frits Bolkestein, then commissioner in charge of the proposal, insisted that unlimited liability would discipline auditors and guarantee better performance.

The Dutch presidency tabled a report on the auditing directive to ambassadors yesterday (24 November), ahead of the 7 December meeting of finance ministers.

Governments are divided in some key areas - such as the rules designed to ensure independence of auditors - but they agree that member states should, in certain circumstances, add extra rules and obligations beyond the remit of the directive.

Article says that senior MEPs support the idea of a bankruptcy safety net for auditors introducing a maximum liability range. Such provisions could help to avoid a situation leaving very few companies dominating the market. The collapse of Arthur Andersen in the wake of the Enron affair came about when the auditor failed to spot the financial scandal involving its clients.