"There Is No Point Reforming the Rules on Auditors If the Liability Regime Continues to Be as Lax as It Currently Is." Discuss.
Auditors provide a key investigation function in the business world. The law in relation to the liability of auditors changed significantly with the introduction of Companies Act 2006. It is now possible for audit firms to limit their liability towards clients through contractual agreements. The current auditing liability regime has proven to be controversial. This essay will first present the relevant liability rules and examine the underlying problems, then evaluating the significance of these rules with regard to auditing reforming.
Overall, an auditor can be liable either in contractual, tortious or …show more content…
The CA 2006 demonstrates criminal offences in connection with auditor’s report if a person “knowingly or recklessly causes a report under section 495 (auditor’s report on company’s annual accounts) to include any matter that is misleading, false or deceptive in a material particular.” There are a number of limitations to this section. Firstly, the scope of this liability is narrower than in private law as it is limited to intentional or negligent misstatements. Secondly, there is the problem of establishing what types of conduct or omissions may give rise to recklessness and therefore criminal liability.
Approaches above showed how current legal rules decide whether liabilities should imposed on auditors and the corresponding problems lying behind. The key issue of joint and several liability is that a claimant can choose to pursue one party for the sum of all his losses where any defendants may be liable. It is argued by auditors that they are often sued unfairly or for an unfair proportion to the claimant’s loss considering their contribution. Accountancy profession debates that this would eventually bring on insufficient audit capacity and the collapse of an accountancy firm, which will have destructive effects on the whole market. There are indeed reforms working on limiting auditor’s liabilities. Liability limitation agreements were introduces to the auditing industry. However none of the Big Four use them when