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Auditors seek protection

"The cost of our audits was never built for insuring the capital markets," said William G. Parrett, chief executive of Deloitte Touche Tohmatsu, the international arm of Deloitte & Touche. "I don't think we're saying we shouldn't have any liability, but it has to be in proportion to our participation in any problem."

The firms also say they can't get sufficient insurance because their liability is almost unlimited, encompassing in a worst-case scenario the total stock-market value of the companies they audit. So they are forced to settle lawsuits rather than risk a trial.

A study for the European Commission, released in September, said the total costs of judgments, settlements, legal fees and related expenses for the U.S. audit practices of the Big Four firms had risen to $1.3 billion in 2004, or 14.2% of revenue, up from 7.7% in 1999. In addition, according to a study by insurer Aon, there were 20 claims outstanding against U.S. auditors as of September 2005 where damages sought or estimated losses topped $1 billion. Accounting firms say they couldn't survive an award of that size.

Advocates of liability caps frame the issue around the broader debate over U.S. market competitiveness.

"I think the whole issue of liability is one of the major reasons why foreign companies aren't coming here" to list their stocks on U.S. exchanges, said Hal S. Scott, a Harvard Law School professor and a founding member of the Committee on Capital Markets Regulation, the group formed with [Treasury Secretary Henry] Paulson's blessing to study market competitiveness.

("Booming Audit Firms Seek Shield From Suits", Wall Street Journal, Nov. 1). See also Larry Ribstein, who comments on the idea of permitting auditors to resolve the matter contractually.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.