Mr.Yussif Essay

8685 Words 35 Pages
An assessment of the implications for competition of a cap on auditors' liability

July 2004

OFT741

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1.1

EXECUTIVE SUMMARY
This report contains the OFT's advice to Government on the implications for competition in the audit market of proposals to permit auditors to limit their liability by way of negotiated caps.

The current liability position
1.2 At present auditors may not limit their liability for fault due to negligence or incompetence in audit work. Alongside regulation and reputation, liability acts as a discipline on audit quality in a context where shareholders and other third parties rely on information from an audit which is paid for by the company being audited. We are not aware of evidence suggesting that the
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Audit, and the non-audit services sold to audit clients, are valuable business that the Big Four firms appear keen to retain. Third, as in the case of Andersen, reputation damage rather than financial damage is likely to be the primary cause of collapse for a Big Four firm implicated in a major audit scandal, should that ever occur in future. If the claims are generated abroad, a cap on liability in the UK would offer little protection for an audit firm's global network.

1.7

Cap design
1.8 Lack of adequate safeguards and some forms of cap design – for example caps that afforded proportionately more protection to large auditors – could distort competition.

Conclusion
1.9 It is likely that allowing audit caps would be competitively neutral overall. Arguments that allowing caps would be pro-competitive are not compelling. Some forms of cap design could distort competition, so it will be important to ensure that there are no anti-competitive effects if scope for caps is allowed.

Office of Fair Trading

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2.1

BACKGROUND
Following the Enron affair and subsequent collapse of Andersen, the OFT announced that it would keep the accountancy and audit market under review and would advise on any competition implications arising from any proposals for regulatory reform.1 The Department of Trade and Industry (DTI) recently consulted on the issue of permitting auditors to limit their liability (the

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