Counting on Europe: Liability Limits on Auditing in the European Union Will Have Global Implications

Article excerpt

Following a series of high-profile mergers and the collapse of Arthur Andersen, the number of audit firms operating internationally has been reduced significantly. At the same time, the audit profession has been the target of a number of high-end claims and increased litigation. As a result, access to audit-liability insurance coverage has become increasingly limited.

Concerned about these developments and fearing that they might endanger the smooth functioning of capital markets, the European Commission decided to intervene. On June 5, the Commission issued a recommendation concerning limitations on the civil liability of statutory auditors and audit firms.

The principal aim of the Commission's recommendation is to ensure that there is a sufficient number of--and choice among--audit firms capable of and willing to conduct statutory audits of listed companies. The Commission believes that by limiting the liability of auditors it will not only reduce the risk that statutory auditors might no longer be available to audit listed companies but will also encourage more auditors to audit listed companies.

The scope of the recommendation is relatively narrow; it only concerns the civil liability of auditors and audit firms in entities admitted to trading on a regulated market in a European Union member state. The suggested limitations also apply to the company audited and to third parties entitled to bring a claim for recompense. On the other hand, the limitations do not apply in cases of intentional breach of duties by the statutory auditor or the audit firm.

Muddying the waters even further, the Commission has 'also opted to avoid imposing one single method of limiting auditor liability. Instead, the Commission recommends that each member state should take measures to limit liability according to its own preferred method, while simultaneously stating that any limitation of civil liability should not prevent parties from being fairly compensated.

The Commission does, however, suggest the following three methods of limiting liability: (1) the establishment of a maximum financial amount or of a formula allowing for the calculation of such an amount; (2) ensuring that a statutory auditor or an audit firm is not liable beyond its own, actual contribution to the loss suffered by a claimant; and (3) allowing a company to be audited and the statutory auditor or audit firm to negotiate agreements that specify limitations on liability.

At first sight, the Commission's recommendation could be considered a major change in the EU's approach to auditor liability. …