European Auditor Liability Rules May Be Reformed

by Ulrika Lomas, for LawAndTax-News.com, Brussels

19 January 2007

The European Commission announced this week that it has launched a public consultation on whether there is a need to reform rules on auditors’ liability in the EU, and if so, on the possible ways forward.

This follows an independent study on the economic impact of current auditors' liability regimes and on insurance conditions in Member States.

The Commission has presented four possible options for reforming auditors' liability regimes in the EU, and invites stakeholders to give their views on the issues involved by 15 March 2007.

Internal Market and Services Commissioner Charlie McCreevy observed that:

"There is an increasing trend of litigation against auditors, but often they cannot obtain sufficient insurance to cover the risk. So there is a real danger of one of the "Big Four" being faced with a claim that could threaten its existence."

"There are many ways to improve this situation: some Member States already have capped auditors' liability, while others are introducing proportional liability combined with some limitations on who can sue auditors."

" However, given the differences between national markets, there is probably no one-size-fits-all approach. I want to ensure a thorough debate on the possible ways forward, and I encourage interested parties to give us their views."

In October 2006, the Commission published an economic impact study prepared by an external consultant, London Economics. On the basis of this study, the Commission invites stakeholders to give their views on four possible options for reforming auditors’ liability:

• The introduction of a fixed monetary cap at European level, but this might be difficult to achieve.
• The introduction of a cap based on the size of the audited company, as measured by its market capitalisation.
• The introduction of a cap based on a multiple of the audit fees charged by the auditor to its client.
• The introduction by Member States of the principle of proportionate liability, which means that each party (auditor and audited company) is liable only for the portion of loss that corresponds to the party’s degree of responsibility.

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