View from City Road: Auditors can afford to stand their ground

It is understandable that the auditors of Insurance Corporation of Ireland should settle out of court in a case over work done a decade ago. After all, an army of lawyers with a mountain of documents would probably have spent a significant chunk of Ireland's gross domestic product over the next two years arguing over the details. As the insurers were willing to pay Ir pounds 77m, there was no sensible reason for the partners of Ernst & Whinney in Ireland to resist an out-of-court deal.

But what looks right from the perspective of individual firms is wrong for the auditing industry. In 97 per cent of cases, auditors settle out of court, and it is more often than not under pressure from their insurers, who fear the unpredictability of legal costs in long trials and of the final awards by the courts.

There has been much talk of getting the Government to change the law so accountants would no longer bear liability for the whole of a loss suffered by a client, perhaps accompanied by a cap on damages that would be a multiple of audit fees. Miracles may happen, but in the meantime there is no substitute for good case law, if only more went to court.

The UK Caparo case narrowed the definition of an auditor's liability, proving that it is possible to make progress against an avalanche of claims by asking the courts to clarify the law. Abroad, Price Waterhouse has won a retrial of a dollars 338m award against it, in a US case brought by Standard Chartered. But actual US payouts last year totalled dollars 752m, 800 per cent up in two years.

Market forces may, however, force changes. Insurance cover is continuing to dry up. Mutual insurance is available through two schemes, Pail and Padua, but strains are said to be developing among member firms because of the sheer scale of claims.

If Price Waterhouse settles an dollars 8bn claim by the liquidators of BCCI in proportionately the same amount as the Dublin settlement, the cost would be more than dollars 600m. Soon, the big six firms may find it preferable to stand their ground more often. They would - in the end - benefit from a tougher stance. So would their clients: while auditing remains a legal requirement, insurance costs for professional negligence are merely passed on to the customer.

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