Abstract

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Monetary Caps on Damages Due to the Liability of Auditors for Audit Failures in Publicly Listed Companies - Subtitle: A Comparative Legal Analysis between Common Law and Civil Law Regimes in Countries, Which Have Capping Damage Awards of Auditors


A. Jeffrey Miller


affiliation not provided to SSRN

August 1, 2008


Abstract:     
Monetary CAPS on Damages due to the Liability of Auditors for Audit Failures in Publicly Listed Companies.
A Comparative Legal analysis between Common Law and Civil Law Regimes in countries, which have Capping Damage Awards of Auditors.

Monetary CAPS on Damages due to the Liability of auditors for Audit Failures in Publicly Listed Companies.
A Comparative Legal analysis between Common Law and Civil Law Regimes in the Limitation of Monetary Damage Awards a Court can hold an Auditor of a Publicly Listed Company Liable for or Capping Damage Awards of Auditors.

2. Analysis of Audit Failure in Common Law and Civil Law Regimes 5
What is Audit Failure? 6
Chronology Account of European Regulatory Action 8
Audit failure in the United Kingdom (common law) 9
Historical Analysis of the Auditor 9-
Audit failure in the United States (common law) 11
Auditor Misconduct and Corporate Scandals 14
Audit Failure in France (civil law) 20
The Civil Law Approach 21

The financial markets of Europe and the United States comprise the most reputable publicly listed companies in the world. The actions of the auditor resulted in a audit failure. What is an audit failure? Audit failure occurs when an auditor incorrectly issues an opinion that the annual report represents a publicly listed company's financial condition in conformity with generally accepted accounting principles globally as a result of its actions as auditors. In addition to the Directives, the latest Communication for the Commission to the Member States is a Recommendation for a limitation on auditor liability of auditor caps.

This thesis will focus on the legal liability and the limitation of liability of auditors in large publicly listed companies by using the comparative legal approach in common and civil law regimes. The EU and the U.S. require public companies to disclose similar financial information requirements. which required the annual reports to give a true and fair view of the company's assets, liabilities, financial position and profit or loss was an EU accounting principle.

European Regulatory Action

The Financial Services Action Plan was a major step in a legal framework for auditors.
The Recommendation states that auditors should be prohibited from carrying out a statutory audit one required by law - if the auditors have any relationship with their client that might compromise the auditor's independence. Prompt action is needed to ensure sustainable public confidence in financial markets. Dialogue between investors and auditors are also essential. The general objectives for any policy action are: Reduce the risk to capital markets that statutory auditors might no longer be available to audit listed companies; and encourage more auditors to audit listed companies. Subsequent to the Eight Company Law Directive on statutory audits of annual accounts and consolidate accounts, The European Commission's study on auditor's liability regimes included the question , "Does Auditor liability impact on the quality of audits."
The European Commission issued a Recommendation concerning the limitation of auditors' civil liability. Audit Failure in the United Kingdom (common law).

In the UK, following the City Equitable Fire Insurance case where auditors escaped liability because of the articles of association, the 1929 Companies Act prohibited auditors from limiting their liability . The court also found that the auditor has no accountability or liability to third parties. Auditor Failure in the United States (common law).

In America, the auditor was an accountant who served the company. Audit was viewed.

Prompt action is needed to ensure sustainable public confidence in financial markets. Audit firms play a key role in ensuring the integrity of financial statements and the effectiveness of internal controls of public companies. Auditors review and certify the annual accounts of public listed companies.

In the audit area, fearing the disappearance of another major accounting firm, the Committee Report recommends a cap on the liability of auditors. According to Professor Coffee, auditors financial misconduct has implications for design of legal controls to protect public shareholders. What is audit failure? Audit failure occurs when an auditor incorrectly issues an opinion, among other things, that the annual report represents a publicly listed company's financial condition in conformity with generally accepted accounting principles. The stakes of audit failure are enormous when only three large firms are competent to audit the vast majority of public enterprises. Duties and liabilities of auditors are based on company law and common law case law and not based on any type of securities regulations as in the U.S. The law of the state of incorporation and its state case governs corporate liabilities and duties under contractual liability. What would be the effect of introducing auditor liability limitation on industry concentration? Audit Failure in France.

French law is based on the legal theory of justifiable reliance as a basis of liability for incorrect advice, such as the advice of an auditor in a large public company. In French law, liability for incorrect information will usually fall under contractual liability.

The French law of articles 1282 and 1383 Code Civil is a general system of tort law. French law as a civil system lays down the principle that an audit failure causes liability in either contract or tort, as long as there is a legal causal link in the audit failure and the economic damages claimed. For the first time in history of the accounting and auditing profession, auditors are subject to public oversight. The U.S. may pursue the auditor cap or safe harbor rules for auditors. One could imagine a single European system of auditor liability and caps for those auditors who are working for large publicly listed companies.

CESR, Report on the Current State of Integration of EU Financial Markets, Annual Reports (April 2005)

Company Law and Corporate Governance Action Plan, IP/03/716 of May 21, 2003

COM 629 White Paper on Financial Services Policy 2005-2010 (2005)

Financial Services Authority, Financial Risk Outlook (2005)
FSA, Financial Risk Outlook 2006, p.97. Annual Report 2006, 46th.
The Statutory Audit Directive replaces the Eighth Company Law Directive of 1984 (Directive 84/253/EC) and also amends the Fourth and Seventh Company Law Directives (Directives 78/660/EEC and 83/349/EEC) by introducing additional EU rules on the audit of company accounts.

GAO, Public Accounting Firms, Mandated study on consolidation and competition, Report to the Liability: Commission consults on possible reform of liability rules in the EU . Miles Gietzmann, Auditor Performance, Implicit Guarantees, and the Valuation of Legal Liability, International Journal of Auditing 1, 13-30 (1997)

Competition and choice in the UK audit market. Steven L. Schwarcz2, Financial Information Failure and Lawyer Responsibility, 31 Journal of Corporation Law. William A. Gregory, Accounting Firm Consolidation: Selected Large Public Company Views on Audit Case Law in Chronological Order

The French Civil Code in an audit failure which results in an economic loss to another person is a result of an auditor of a publicly listed company who misrepresents the annual report. damages. There is a division of negligent liability in French law. liability and liability for simple or gross negligence.

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Date posted: December 6, 2008 ; Last revised: March 12, 2009

Suggested Citation

Miller, A. Jeffrey, Monetary Caps on Damages Due to the Liability of Auditors for Audit Failures in Publicly Listed Companies - Subtitle: A Comparative Legal Analysis between Common Law and Civil Law Regimes in Countries, Which Have Capping Damage Awards of Auditors (August 1, 2008). Available at SSRN: http://ssrn.com/abstract=1311384 or http://dx.doi.org/10.2139/ssrn.1311384

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Alan J. Miller (Contact Author)
affiliation not provided to SSRN ( email )
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