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Auditor's Liability and its Impact on the European Financial Markets

Cambridge Law Journal, Vol. 67, No. 1, pp. 62-68, 2008

7 Pages Posted: 2 Nov 2008  

Walter Doralt

Max Planck Institute for Comparative and International Private Law

Alexander Hellgardt

University of Regensburg - Faculty of Law; Max Planck Institute for Tax Law and Public Finance

Klaus J. Hopt

Max Planck Institute for Comparative and International Private Law; European Corporate Governance Institute (ECGI)

Patrick C. Leyens

Max Planck Institute for Comparative and International Private Law

Markus Roth

University of Marburg - Faculty of Law

Reinhard Zimmermann

Max Planck Institute for Comparative and International Private Law

Date Written: March 1, 2008

Abstract

Statutory auditors serve as an integral device to safeguard confidence in European financial markets. The market for corporate auditing is highly concentrated. A collapse of one of the top four auditing firms could cause a severe lack in the availability of auditing services. In a 2007 Staff Working Paper the European Commission proposed to reform auditor liability and to protect auditing firms from catastrophic liability claims. This paper analyses the reform options suggested by the European Commission and pleads, in essence, for the following liability rules:

1. The company and its auditor may enter into an agreement limiting the amount of liability of the auditor in respect of any negligence occurring in the course of the audit, subject to approval by the general meeting of the audited company.

2. This limitation may not be set below a fair and reasonable amount. The definition of fair and reasonable should be laid down in a European framework, providing a set of basic criteria, including the sum of fees paid to the auditor and the size of the company.

3. If the amount of liability significantly deviates from what would be fair and reasonable, the court which decides on a damage claim against the auditor declares the agreement void.

4. In the assessment of the validity of the agreement, the court shall take into account the European framework basic criteria to be considered by the parties and additional factors such as auditor independence and the applicability of institutional and individual insurance excesses.

Keywords: auditor liability, liability cap, general meeting, auditor independence

JEL Classification: M49, K13, K22, K23

Suggested Citation

Doralt, Walter and Hellgardt, Alexander and Hopt, Klaus J. and Leyens, Patrick C. and Roth, Markus and Zimmermann, Reinhard, Auditor's Liability and its Impact on the European Financial Markets (March 1, 2008). Cambridge Law Journal, Vol. 67, No. 1, pp. 62-68, 2008. Available at SSRN: https://ssrn.com/abstract=1293244

Walter Doralt

Max Planck Institute for Comparative and International Private Law ( email )

Mittelweg 187
Hamburg, D-20148
Germany

HOME PAGE: http://www.mpipriv.de/de/pub/wissenschaftler/affiliates/doralt_walter.cfm#i48541

Alexander Hellgardt

University of Regensburg - Faculty of Law ( email )

Universitätsstraße 31
Regensburg, 93053
Germany
+49-941-943-2641 (Phone)
+49-941-943-4985 (Fax)

HOME PAGE: http://www.uni-regensburg.de/rechtswissenschaft/buergerliches-recht/hellgardt

Max Planck Institute for Tax Law and Public Finance

Marstallplatz 1
Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/hellgardt_alexander.html

Klaus J. Hopt

Max Planck Institute for Comparative and International Private Law ( email )

Mittelweg 187
D-20148 Hamburg
Germany
+49 40 41 90 02 05 (Phone)
+49 40 41 90 03 02 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Patrick C. Leyens (Contact Author)

Max Planck Institute for Comparative and International Private Law ( email )

Mittelweg 187
D-20148 Hamburg
Germany

HOME PAGE: http://www.mpipriv.de/ww/en/pub/home.cfm

Markus Roth

University of Marburg - Faculty of Law ( email )

Universitaetsstr 6
Universitätsstraße 6
Marburg, D-35037
Germany

Reinhard Zimmermann

Max Planck Institute for Comparative and International Private Law ( email )

Mittelweg 187
Hamburg, 20148
Germany

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