Support for Limiting Auditor Liability

A liability cap might encourage smaller firms to compete with the Big Four, enhance competition and choice, and help prevent another Arthur Andersen.
Stephen TaubJanuary 18, 2005

The president of the Business Roundtable is urging regulators to limit the liability accounting firms face from potential negligence claims.

In an interview with the Financial Times, John Castellani said he is concerned that litigation could put another major accounting firm out of business and further shrink the ranks of auditors. “There are other accounting firms that could develop a global capability, similar to the Big Four, but shy away from it because of the increased liability and exposure to lawsuits,” he told the paper. “To the extent we can do things that enhance competition and choice in this we are very supportive.”

Castellani and the accounting firms are mindful, of course, of the demise of Arthur Andersen — which in effect put out of business by government officials after its Houston office was linked with wrongdoing at Enron Corp.

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Under the Sarbanes-Oxley Act of 2002, companies are restricted from using their auditors for certain non-auditing work, so it is not unusual for companies to hire two auditing firms to meet many needs. Indeed, as companies gear up to comply with Section 404 of Sarbanes-Oxley, which guides how auditors report on companies’ assessments of their internal controls, companies have been enlisting the services of accounting firms other than their auditors to help meet that requirement.

The Business Roundtable includes as members the chief executive officers of many large U.S. public companies; late last year the top executives of the four largest accounting firms became members as well.

The Roundtable’s corporate governance taskforce is considering what form a limit on auditors’ liability could take, according to the FT.