The issue of auditor liability has long been a source of considerable concern to ICAI, and indeed, the auditing profession globally.

In many jurisdictions, statutory auditors continue to be exposed to potential liabilities of a ‘catastrophic’ level with the very real risk prevailing that any one claim would be sufficient to result in the demise of a large audit network. Efforts aimed at achieving reform have emphasized the inherent inequities in many liability regimes that impose disproportionate liability on auditors in the event of corporate failures where the primary fault has been elsewhere.

To cite Ireland as an example. Statutory auditors in Ireland are in a unique and precarious position compared to other service providers to corporate entities. The existing prohibition on limitation of liability and the ban on corporate entities from undertaking statutory audit work (and the unavailability of LLP vehicles) means that individual auditors are exposed to unlimited liability. Furthermore, the principle in Irish law of ‘joint and several liability’ means that auditors are potentially responsible not only for losses caused by their own actions or failings but also for those who may have primary responsibility for such losses but have no resources to meet claims awarded against them.

So, in an action arising as a result of a corporate collapse where the directors and/or other senior management have been found to be principally at fault, with the auditor's culpability being relatively minor, the auditor may still have to bear 100% of any loss arising due to the insignificant resources of other defendants to the claim.

In the Irish context, the practical impact of the existing liability regime is that personal assets (including, for example, private residences) of all partners in audit firms are exposed in the event of a catastrophic loss, notwithstanding that most partners will have had no involvement or culpability in the matter giving rise to that loss.

While auditors’ potential liability is unlimited, this liability is not and cannot be matched by unlimited resources. Indeed, the ability of even the largest audit firms to meet massive claims is limited by the non-availability of adequate professional indemnity claims.

In seeking reform, auditors are not seeking to avoid liability for the consequences of their own actions or negligence. Any reform should result in auditors remaining responsible for the their share of any loss arising from any corporate failure and should offer no relief for criminal or fraudulent activity by the auditor.

‘Auditing is not just any industry, but one that plays a pivotal role in our capital markets. Were the ‘Big Four’ to turn into the ‘Big Three’, or even worse, into the ‘Big Two’, capital markets at large could face serious consequences.’

So said European Commissioner for Internal Markets and Services, Charlie McCreevy in an address to the FEE (the European Accountancy Federation) Conference on Audit Regulation in October 2006. Yet without reform, the scenario outlined by the Commissioner remains real.

Liability reform has now been placed centre stage by policy-makers in many jurisdictions who have demonstrated an awareness of the need for reform in this area, Australia, Belgium, and, significantly, the United Kingdom being recent examples.

One critical preventative step is to encourage increasing competition and choice in the audit market – particularly in the audit market of capital market entities. An essential element for achieving this is reform of liability regimes faced by auditors.

Since Commissioner McCreevy's speech to the FEE conference, the EU has undertaken a major consultation on auditor liability during 2007. This, in turn, has lead to an announcement by the Commissioner in December 2007 that he would be bringing forward a formal European Union ‘Recommendation’ asking Member States to implement appropriate measures to limit auditor liability. In making this announcement the Commissioner acknowledged that while every effort should be made at encouraging new entrants into the market for large audits and the development of stronger international networks (aimed at promoting greater choice and ensuring the continuity of supply of audit services) auditors had a right to expect that liability risks faced by the profession should be addressed by legislators. Indeed, many EU Member States have already implemented appropriate measures.

In Ireland, too, there are indications that the issue is receiving serious consideration. In early 2006 ICAI began looking again at the issue. In a publication entitled ‘Auditor Liability – the Reform Imperative’, ICAI argued that a public interest priority was the need to ensure the continuity of supply of high quality audit services, particularly at the larger end of the market.

Announcing that he had asked Ireland's Company Law Review Group to consider the issue, Minister Michael Ahern stated in January 2007:

‘With only four large global players in the audit market, a single case taken against one of these could have the capacity to bring down that firm and thereby reduce the choice in the audit market, in addition to the tremor which such a development would create in the audit profession and the wider corporate sector. Ireland's successful inward investment thrust and thriving financial services sectors….cannot survive without a competitive auditing services infrastructure.’

At this time, the conclusions and recommendations of the Company Law Review Group on this issue are awaited.