auditing firms seek limited liability 
13 August 2008

They contextualised their proposal to Parliament’s trade and industry committee in light of the worldwide trend of auditing firms being confronted with such large claims for damages for negligence that the sustainability of the profession was now threatened.  A plea was also made by several publishers for the retention of an existing provision in the Companies Act allowing the public access to the securities registers of companies.

Deloitte and PricewaterhouseCoopers urged the committee during public hearings on the bill to include a provision which would allow an auditing firm and its client company to enter into a yearly agreement to limit the auditor’s liability to the company for professional negligence subject to shareholder approval.  This would be in line with UK law which came into force earlier this year.

The inclusion of such a clause would require an amendment to the Auditing Profession Act which specifically prohibits any agreement to limit liability and only limits liability for fraud or negligence and where third parties suffered a loss because they relied on an auditor’s report.  “International experience has shown that as companies have become larger and their activities global, and as society has become more litigious, auditors have faced an increasing number of claims including many which if successful would be beyond their financial resources,” Deloitte senior manager of accounting and auditing Johan Erasmus said.

He said the position was made worse if other parties to the claim were unable to pay it and the auditors were required to foot the entire bill on a “joint and several” basis and not just their portion.  “Without a means of limiting auditor liability, audit fees might increase to cover the risks or firms would not be willing to accept appointments as auditors of higher risk entities,” Erasmus said. “Without protection, auditors might also adopt a defensive, risk-averse approach to auditing ”.

PricewaterhouseCoopers said the European Commission had also recommended measures to limit auditors’ civil liability. Research showed that unlimited liability was no longer tenable when combined with insufficient insurance cover in the sector; that it could undermine capital markets if it led to the closure of one of the world’s large auditing firms; and acted as a barrier to the entry of new auditing firms to the market.

Meanwhile the publishers of the Mail & Guardian, Who Owns Whom and Rhodes University Centre for Economic Journalism in Africa warned that the bill undermined transparency by limiting access to the securities register .

Linda Ensor, www.businessday.co.za