Abstract
Despite attempts to find appropriate regulatory solutions, the issue of the civil liability of statutory auditors and the perceived need for some form of liability limitation continues to evoke divergent views and reactions. The analysis in this chapter indicates that such divergence is characteristic not just of the positions taken by various stakeholder groups but also of the differences in the nature and scope of auditor liability regimes adopted in individual countries. This chapter uses such analysis to suggest that the auditor liability debate and the continuing search for a regulatory solution has potentially hindered more focused consideration of the professional identity of auditors, their capacity to meet public expectations and the extent to which such capacity (and achievements) varies across countries and the differing cultural contexts in which auditors work.
This Chapter includes the paper originally titled “Re-Thinking Auditor Liability: the case of the European Union’s Regulatory Reform” and discussed at the Fifth International Workshop on Accounting and Regulation in 2010.
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- 1.
See ‘A shared shield’, ACCA website (www.accaglobal.com/en/member/cpd/auditing-assurance/planning/sharper-shield.html).
- 2.
In the first case, Ernst and Young and its former client services partner, Kevin McNamara, were initially held responsible in 2008 for more than 20 instances of a lack of professional competence during an audit of Equitable Life and fined £4.2 m. However, after the appeal, the initial ruling was overturned and the fine reduced to £500,000. In the second case, the creditors of the New Century, America’s second largest subprime lender which collapsed in April 2007, claimed that KPMG’s audits were ‘recklessly and grossly negligent’. Such an assessment was also echoed in the 2008 report prepared by the US Department of Justice appointed examiner Michael Missal. This argued that KPMG contributed to the New Century’s failings ‘in critical ways’, for example, by suggesting alternative methods for calculating the company’s reserves needed to cover defaulting loans. In July 2010, it was reported, however, that the lawsuit was resolved in a settlement where KPMG LLP was required to pay $44.75 m. Such appeals and associated settlements, though, have not tended to quell the level of debate, with critics of the profession in the press expressing a sense of bafflement at how auditors could not have a certain degree of responsibility for failing to spot scandals of the magnitude of, for example, the Equitable Life case (e.g. see Ruth Sutherland in her article in the Observer (6/10/10) entitled “Equitable case shows it’s time for regulators to bring auditors to book” (see http://www.guardian.co.uk/business/2010/jun/06/equitable-life-ernst-and-young).
- 3.
See ‘Hands off the auditors’ ‘deep pockets’, Financial Times, 12 October 2005. http://www.ft.com/cms/s/0/102da602-3b85-11da-b7bc-00000e2511c8.html
- 4.
Such a regime means that any audit partner accused of wrongdoing can be required to pay the entire amount of damages irrespective of whether the damages were caused by the unprofessional audits or by the wrongdoing of other parties, such as the company’s management.
- 5.
Proportionate liability is a regime where an auditor can be asked to compensate for the damages caused but only in proportion to the degree of his/her culpability.
- 6.
See an evidence statement by Lee White, a Chief Executive Officer at the Australian Institute of Chartered Accountants, made as part of the enquiry led by the Select Committee on Economic Affairs of the British House of Lords into audit market concentration in the UK in November 2010 (House of Lords 2010, p. 151).
- 7.
The case became the first in the US history where criminal charges were brought against auditors who were found guilty of conspiracy even though they did not personally benefit from providing unprofessional audits. Specifically, the jury accused the auditors of having made a false and misleading statement by having inappropriately issued an unqualified opinion on fraudulent financial reports prepared by the Vending Machines.
- 8.
A series of major law suits is widely cited as having led to the Chap. 11 bankruptcy filing by Levanthol Horwath in November 1990, which prior to its collapse had been the seventh largest audit firm in the US.
- 9.
In the US, apart from the PSLRA, examples of other key pieces of legislation covering the issue of auditor liability include relevant sections of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act (RICO) enacted in 1970. Section 10(b) of the 1934 Securities Exchange Act, for example, which is used most frequently as a basis upon which the damaged parties bring federal suits against auditors, deems it unlawful to use ‘any manipulative or deceptive device in contrivance of ··· (the securities) rules and regulation as the (Securities and Exchange) Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors’. In addition, section 11 of the 1933 Securities Act gives the parties affected as a result of unprofessional audits a right to take action against an auditor of a company that files a registration statement that contains ‘an untrue statement of a material fact or omitted to state a material fact’. Both sections place the burden of proving the materiality of misstatements and the causality between such misstatements and the losses incurred on the plaintiffs themselves.
- 10.
See, for example, ‘Auditor liability deals blocked’, Financial Times, 11th March 2009.
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Humphrey, C., Samsonova, A. (2014). A Crisis of Identity? Juxtaposing Auditor Liability and the Value of Audit. In: Di Pietra, R., McLeay, S., Ronen, J. (eds) Accounting and Regulation. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8097-6_6
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