Auditor Liability
... to be liable for only those losses for which they are ultimately deemed responsible. With current standards of joint and several liability, courts charge the defendant for the entire loss of the plaintiff, despite the transgression of other individuals. If an auditing firm is responsible for 5 percent of the damages, it has exposure to 100 percent of the loss. As a result of joint and several liability, new recruits choose other professions; firms may stop auditing many of the world’s top companies in fear of the risk involved (The Economist). With one successful lawsuit, one of the big four firms could go bankrupt like the former Arthur Anderson. The collapse of another large firm would create a crisis of confidence in the capital markets and a further undermining of the audit profession (Michaels and Parker). With joint and several liability, auditing firms struggle to find insurance companies willing to cover its lawsuit damages. As a result, companies turn to self-insurance, an ineffective solution when faced with a lawsuit. According to Arens, Elder, and Beasley, the professional aggregate legal liability exposure exceeds $40 billion. The number of lawsuits and the size of the awards continue to increase. Financial statement users recognize the responsibility of public accountants, while the courts have trouble understanding and interpreting complex accounting and auditing procedures. The following are examples of recent litigation within the auditing industry: In 2003, Ernst & Young faced a lawsuit from the policyholders of Equitable Life for $4.77 billion. The life insurance company questioned its going concern in the year 2000 when the auditing firm failed to identify material errors on the financial statements (Reilly). Internationally, Parmalate SpA brought a lawsuit against Deloitte & Touche and Grant Thornton for at least $10 billion. The Italian food retailer seeks damages from third parties believed to have played a role in Parmalat’s collapse (Aldred). Proportionate liability attempts to decrease the severe penalties auditors face. Regardless of the benefits derived through proportionate liability, there are numerous complaints against its implementation. Opponents claim that unlimited liability inspires fear in the auditing firm, resulting in a quality assessment of the financial statements. If quality does not readily exist, the auditing firm should share in the responsibility of the damages. These individuals believe that auditor liability is already practically limited in most countries through legislation, court decisions, and the structure of limited liability partnerships (Reilly). The American government shows no sign of its opinion on the auditor liability debate. John Coffee, a law professor at Columbia University, predicts that the auditing profession in the United States will soon start lobbying for a change in liability. It is in America that the big four are the most vulnerable (The Economist). The current liability standards in the United States fail to fully protect the auditing firm. Auditor liability within th...