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Auditor Liability Reforms in the UK and the US: A Comparative Review

47 Pages Posted: 11 Sep 2007  

Tim Bush

Hermes Pensions Management Ltd.

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Stella Fearnley

Portsmouth Business School

Date Written: August 2007

Abstract

The past decade has seen many changes in audit liability regimes of the US and the UK, and more may be on the way. These include LLP status for audit firms, proportional liability, and the introduction of various forms of liability caps through contract in engagement letters. These changes may affect audit quality, price and profitability, the organization of the market for audit services, as well as domestic and cross-national mechanisms for regulation of this market. What have been, or will be the consequences of these changes? Will the auditors, who advocate many of these reforms, benefit from them? Will the investors, who advocate other reforms, benefit from them? Answers to these questions are relevant to policy decisions at hand. We analyze the recent changes and the proposals for future changes on the basis of available research on the market for audit services, including some studies commissioned by regulators. We find it difficult to establish a correspondence between the self-interest of the advocates of various changes and the observed and anticipated effects of such changes. More evidence is needed to inform the debate in the corridors of power. Such evidence could be obtained by requiring audit firms to publish information about their true litigation costs. Moreover, the regulatory process might benefit from somewhat greater reliance on market forces.

Keywords: Auditor liability, U.K. and U.S. comparison, International accounting

JEL Classification: K22, M49

Suggested Citation

Bush, Tim and Sunder, Shyam and Fearnley, Stella, Auditor Liability Reforms in the UK and the US: A Comparative Review (August 2007). Available at SSRN: https://ssrn.com/abstract=1011235

Tim Bush

Hermes Pensions Management Ltd. ( email )

Lloyds Chambers
1 Portsoken Street
London, E1 8HZ
United Kingdom

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Stella Fearnley

Portsmouth Business School ( email )

Accounting & Management Science
Locksway Road
Southsea, PO4 8JF
United Kingdom
00-44-1202-706895 (Phone)
00-44-1202-706895 (Fax)

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