Setting a Statutory Cap on Auditors’ Liability -- What Method Should Be Used?

10: 1 Rutgers Business Law Review (2013) 56

45 Pages Posted: 27 Jan 2014

Date Written: Febuary 1, 2013

Abstract

The increase in market capitalization of companies over the past decade as well as the rapid growth of international participation in financial markets with a decrease in access to insurance has produced a corresponding dramatic increase in auditors' exposure to liability risk. This enhanced risk and its negative implications have resulted in an international trend intended to limit auditors' liability.

Currently, auditor liability is limited in approximately thirty-three countries. Liability is limited via one or more of the following methods: contractual stipulations; setting a statutory compensation cap; adopting a proportionate liability rule; and permitting association of accountants in a limited liability corporation. Eleven countries out of the thirty-three with limited auditor liability use a statutory cap.

This international trend requires that a number of issues are addressed. What is the appropriate method for setting a cap? What is the appropriate method for applying a cap? What is the desirable level for a cap? These issues have not yet been reviewed in-depth and, therefore, are the center of this study.

The paper has dual purpose: first, to present the considerations that should be addressed in selecting the method for applying and setting a cap. Second, critically analyze the alternative methods for setting and applying the cap. I will review these issues using a pluralist theoretical approach. Economic utility, justice, and fairness considerations comprise the theoretical framework.

Keywords: Auditors’ Liability; Statutory Caps; Methods; Torts

Suggested Citation

Karako-Eyal, Nili, Setting a Statutory Cap on Auditors’ Liability -- What Method Should Be Used? (Febuary 1, 2013). 10: 1 Rutgers Business Law Review (2013) 56, Available at SSRN: https://ssrn.com/abstract=2385661 or http://dx.doi.org/10.2139/ssrn.2385661

Nili Karako-Eyal (Contact Author)

College of Management (Israel) ( email )

7 Rabin Blvd.
Rishon Lezion
Tel Aviv, 75190
Israel

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