UK boosts hopes of auditor liability cap

By Anna McLauchlin

Date: 13/01/05

THE European accounting industry has welcomed the UK's move to limit the liability of auditors in Enron-type scandals, hoping it will convince member states to introduce it into EU law. The UK Department of Trade and Industry struck a deal with businesses in December on measures for 'proportionate' liability for auditors to limit negligence claims and is expected to announce further progress this week before draft legislation is published in the Spring.

Henri Olivier of the European Accountants' Federation said: "The more member states we have around the table which have decided to do something about this issue the more chance there is that they will accept a specific provision."

Governments have so far shied away from including liability in the EU's proposed rules on statutory auditors, the 8th company directive. They were backed by the then internal market commissioner Frits Bolkestein, who called unlimited liability a "quality driver".

According to a Commission spokesman, new internal market chief Charlie McCreevy is currently holding meetings with his staff on the issue and is "considering his position". MEPs have reacted favourably to including liability and the directive will be debated again in the internal market committee next week (19 January) with first reading planned for March. German Liberal Wolf Klinz, 'rapporteur' for the economic committee, said he hoped the UK's stance would throw weight behind the idea. "I have strongly advocated the inclusion of liability in the directive, which should be high enough to offer protection but not so high that it destroys the whole company."

Audit firms have warned that if they remain fully accountable they could be made bankrupt if a financial scandal erupts involving their clients, like the Enron affair that sank Arthur Anderson. If another large audit firm goes under it would result in a near monopoly of the market, already dominated by four companies: PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG.

UK auditors want the 8th directive to ban unlimited financial liability on audit firms but leave it up to member states to decide how to do so.

Nine member states have liability limitation for auditors written into their law, including Germany which sets a €4 million cap and Greece whose cap is set at five times the salary of the president of the Supreme Court. Others, like Poland, stipulate that there must be a limit within a particular contract.

Article reports that the European accounting industry has welcomed the United Kingdom's move to limit the liability of auditors in Enron-type scandals, hoping it would convince Member States to introduce it into EU law. The UK Department of Trade and Industry reached an agreement with businesses in December 2004 on measures for 'proportionate' liability for auditors to limit negligence claims and is expected to announce further progress in late January 2005 before draft legislation is published in the spring.