Government urged inquiry into impact of cap on auditors' liability

Jacqui Smith, the minister for Industry and the Regions, revealed yesterday that the Government had asked the Office of Fair Trading to consider whether limiting liability for audit firms would have an adverse impact on competition in the market.

Jacqui Smith, the minister for Industry and the Regions, revealed yesterday that the Government had asked the Office of Fair Trading to consider whether limiting liability for audit firms would have an adverse impact on competition in the market.

Supporters of a liability limit in the UK for auditors argue it would help to maintain a larger number of players in the marketplace. However, UK institutional shareholders fear an audit cap could cement the grip of the largest four firms and could also lead to a deterioration in the quality of audit work.

The Association of British Insurers is opposed to the move by the Institute of Chartered Accountants (ICA) to persuade the Government to cap auditors' liability if a financial review of a company fails to uncover the type of scandals that have brought down WorldCom, Enron and Parmalat.

Mary Francis, the director general of the ABI, said: "Capping the auditors' liability risks creating a moral hazard which will put auditors under less pressure to deliver quality."

Critics of the cap, such as ABI or Morley Fund Management, a long-time critic of the quality of the audit profession, say that firms which are responsible for serious mistakes or even colluding with illegal practices should not be protected. Morley is also concerned that a liability cap could act as a disincentive for auditors to carry out a thorough and detailed examination of a company's accounting practices.

A Morley spokesman said: "Auditors already benefit from a range of protections, including limited liability. An auditor's duty has become limited to the company itself and needs to go back to its roots - to owe a duty of care not only to the 'client' but to shareholders, investors and others who rely on the accounts to make investment decisions."

The statement from the ABI drew anger from members of the ICA. Peter Wyman, a former president of the body and a partner of PricewaterhouseCoopers, accused Ms Francis of "lecturing" the industry while refusing to discuss a possible cap on liability.

The ICA pointed out that in countries that have imposed a ceiling on liability the move tends to promote competition because it allows smaller auditors to take on larger, more complex clients that would otherwise be serviced by the super-league of accounting firms. Eric Anstee, the ICA chief executive, said: "In Germany, where there is a cap of 4 million, 67 of the top 300 quoted companies are audited outside the big four.

"This is in stark contrast to the UK where there is unlimited liability and all of the FTSE 100 and 248 of the FTSE 250 are audited by the big four.

Mr Anstee countered that keeping the status quo "should not be an option" because it would lead to accounting firms sticking rigidly to the rules and not exercising their professional judgement.

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