Audit firms in the UK left unprotected against claims of negligence
It was announced recently in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.
The Big 4 have been lobbying hard for a cap on payouts, but although Lord Mandelson, the Business Secretary, appeared sympathetic to their concerns, he indicated that he was not prepared to change the law at this stage.
This decision has come as a great blow to the accounting firms, believing that there may not be another opportunity for a change in the law for some time. There fear is that they will be targeted by investors and liquidators looking to recover losses from big company failures and Madoff-type frauds.
Under existing company law, directors can agree, with shareholder approval, to restrict their auditors liability, but to date, no leading companies have done so.
Three of the Big 4 face litigation in relation to Bernard Madoff’s $65 billion fraud.
In 2005 Ernst & Young was sued for £700 million by Equitable Life, the claim was eventually dropped, but would have bankrupted the firm in the UK if successful.
Earlier this year KPMG were sued for $1 billion by creditors of New Century, a failed sub-prime lender.
Big 5 became Big 4 of course following the collapse of Arthur Andersen in the wake of the Enron scandal.
Some fear that Big 4 dominance of the audit market is such that British business would be subject to a state of disarray if a massive court action were to reduce Big 4 to Big 3! It was announced in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.