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COMPANY LAW : CONSULTATION LOOKS INTO AUDITORS' LIABILITY.

Responses to a European Commission consultation on auditors' liability, published on 18 June, show differing views on how to tackle the issue. With recent big financial scandals such as Enron and Parmalat, auditors find themselves in increasing need of liability insurance. However, potential claims are so vast that finding insurance is becoming very difficult. This problem is also acting as a barrier to market entry and so restricting choice and competition.

The Commission consultation, launched in January 2007, sought views on whether and in what way liability should be capped. Responses from the auditing profession were broadly in favour of Commission action, whereas respondents outside the profession tended to favour the status quo in their own member state. Those from countries with liability limitation were in favour, while those from member states where no liability cap exists, were against.

The Commission suggested four alternative reforms: a fixed monetary cap; a cap based on the size of the audited company; a cap based on a multiple of the audit fees charged or proportionate liability, based on the degree of responsibility of the auditor and the audited company.

Capping was the option most favoured by the auditing profession and respondents felt it would address the problem of insurability. However, non-industry respondents were generally more in favour of proportionate liability. Many comments stressed the need to combat the deep pocket syndrome'. This is the tendency for companies to view auditors as a financial bale-out, available, through their liability, to provide compensation for any financial blunders.

The consultation document, the responses and further information are available at ec.europa.eu/internal_market/auditing/liability/index_en.htm

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Publication:European Report
Date:Jun 19, 2007
Words:273
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