The Big Four by Stuart Kells

Author:Stuart Kells
Language: eng
Format: epub
Publisher: Schwartz Publishing Pty. Ltd

Limited liability

When it comes to reducing the scope of audits, the incentives of the Big Four are as strong as they are obvious. The same can be said of auditors’ incentive to reduce their liability when things go wrong. States and countries around the world have passed laws to limit auditor liability. In New South Wales, for example, auditor liability is capped at ten times the audit fee. The public-policy rationale for such laws is questionable, especially as the courts are well equipped to determine and allocate liability. It is hard to see who benefits from liability caps apart from the auditors themselves. Is this another example of the cosy relationship between the Big Four and government?

The UK Economic Affairs Committee noted in 2011 that auditor liability caps may have merit as an encouragement for smaller firms to enter the audit market, and as a protection for auditors to report more fulsomely: ‘A statutory cap on auditor liability would make it more attractive both for non-Big Four firms to bid for large company audits and also for auditors to extend their audit assurance beyond the financial statements.’ Nevertheless, the Big Four are likely to be the main beneficiaries of the caps, which can give rise to a ‘moral hazard’ problem: the more protected they are, the more accountants are inclined to take risks.

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