OFT delivers setback to auditors over liability cap

The Office of Fair Trading concluded yesterday that introducing a cap on auditors' liability would not increase competition in the audit market, decreasing the possibility that the Government will introduce such a measure.

The audit profession, dominated by the big four accountants, Ernst & Young, KPMG, Deloitte and PricewaterhouseCoopers, argues a limit on liabilities would reduce barriers to entry for smaller firms and also cut the risk of collapses.

However, the watchdog dismissed these claims, saying a cap would likely "be competitively neutral overall". The OFT described the unlimited liability for negligence or incompetence as a "discipline on audit quality", noting that although third parties rely on audits, companies pay for them. The OFT also noted the collapse of Andersen was due to reputational, rather than financial damage from the Enron scandal.

The Government, which asked the OFT to investigate the impact of cap on liability in June, is unlikely to support a cap unless it could be shown to benefit the audit market.