Professional Standards Council: Limitation on Liability: Accountants

17 April 2013

Mr Brian Rayment
Professional Standards Council
Locked Bag 5111

Dear Mr Rayment

Limitation on Liability: Accountants

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with the purpose of advancing Australia’s financial competitiveness.

The G100 is pleased to provide comments relating to the limitation on liability under Accountant’s liability schemes.

The members of the G100 are significant users of audit services and as such have an interest in liability schemes for professional accountants and accounting firms. The G100 believes that the current schemes applying to CPA Australia and The Institute of Chartered Accountants in Australia warrant amendments to reflect business and professional developments since 2003.

The G100 believes that the following issues of the schemes should be addressed:

Quantum, and method of calculation, of cap on liability: The cap on liability applies to all civil liability incurred by the accountant in the course of their profession, other than claims relating to personal injury or death, breach of trust, fraud or dishonesty.

Our key concern with the current regime is the setting of the cap based on a multiple of 10 times fees. In our view, the fees for an engagement do not necessarily bear any relation to the potential loss which may arise from negligent conduct by the auditor.

In most instances, the potential consequences if the auditor has been negligent, will be much more than 10 times the fees for the engagement. The current cap is not an effective deterrent of wrongful conduct, inequitably deprives consumers of their rights as claims can easily be in excess of 10 times fees, and unfairly places auditors in a privileged position compared to other defendants such as the corporation and directors or officers of a corporation. While the rationale for a cap of some nature may be sound, the current arrangements, in our view, do not adequately balance the needs of accountants (on the one hand) consumers (on the other).

In our view, the cap on liability should be either a blanket cap applying across the board (eg $75 million) or, if a differential cap is to apply (subject to an absolute ceiling of liability), should be linked to the size of undertaking being audited and other criteria such as the anticipated liability exposure if the auditors are negligent, misleading or deceptive.

As to whether the current absolute ceiling of $75 million is appropriate, we note that, if the recently released replacement draft ICAA Scheme is approved and runs its normal term, a cap on liability of $75 million will have applied for 11 years.

No ability to alter prescribed ceiling: The Schemes do not confer any discretion on ICAA or CPA to specify a higher ceiling for audit work in all cases, a particular case or a particular class of case. By contrast, the NSW Law Society Scheme confers discretionary authority on the Law Society to specify a higher ceiling (with no express limit), on the application of a member, either in all cases, a particular case or a class of case.

The Schemes should confer authority on the ICAA or CPA (as applicable) to specify, on the application of a member, a higher ceiling that would otherwise apply. While there is no certainty ICAA or CPA would approve a higher cap, such a provision would at least allow a consumer of audit services to have a negotiation with an auditor in the consumer’s particular circumstances. At present, the auditor’s hands are tied – it cannot agree to, or even apply for, a higher cap.

Schemes are compulsory: Members cannot opt out of the Schemes. ICAA and CPA retain the power to exempt a member from their Scheme only if it is satisfied that the member will suffer financial hardship in obtaining the prescribed level of professional indemnity insurance. In comparison, the NSW Law Society Scheme permits a member to be exempted from the scheme by application and the larger law firms are exempted (as we understand it) because their clients will not accept a capped liability regime.

Again, as with the caps, the compulsory nature of the scheme leaves (larger, sophisticated) consumers unable to negotiate more suitable arrangements (including caps) which take into account the particular nature of the engagement and the interests of the undertaking being audited and investors.

Yours sincerely
Group of 100 Inc


Terry Bowen

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