Examining the Current Legal Environment Facing the Public Accounting Profession:

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 13: Auditor Liability 2

Abstract

Examining the Current Legal Environment Facing the Public Accounting Profession:
An International Perspective

ABSTRACT
In light of a litigious environment, CPA practitioners often carefully accept potential clients, dismiss many risky clients, raise their total or hourly fees, spend more time examining attestation evidence, and perform other procedures to reduce their litigation risk. This risk arises largely from the courts and others assuming that, since auditors can better absorb and control losses from improper financial statements than can financial statement preparers and users, auditors can increase their fees to “insure” proper financial reporting. This litigious environment already led to the demise of two large international CPA firms—Arthur Andersen and Laventhol & Horwath. However, is society better off having fewer accounting firms with the capacity to perform international audits?

In the US, legal liability is increasing while in the UK and other European Countries, it is decreasing. For example, the Public Company Accounting Oversight Board (PCAOB) recently issued an Exposure Draft to require auditors of SEC clients to increase significantly their audit reports beyond the current Pass/Fail standards, which will surely increase audit firms’ potential legal liabilities. Meanwhile, the European Union (EU), including the United Kingdom (UK), seeks to lower or control their independent auditors’ legal liabilities.

This study examines the recent history and trends of U.S. and EU independent auditors’ liabilities in order to provide input for regulators and legislators to develop appropriate standards and to help auditors find methods to decrease their potential liabilities.


Keywords: CPA Practitioner Liability; International Perspectives

Authors

• Alan Reinstein, Wayne State University

• Carl Pacini, University of South Florida--St. Petersburg

• Brian Patrick Green, University of Michigan-Dearborn