Examining the Current Legal Environment Facing the Public Accounting Profession: Lessons to be learned from UK and EU

• In Event: Contempary Issues in Auditing and Data Analytics

Abstract

This study examines the recent history and trends of U.S. and EU independent auditors’ liabilities to provide input for U.S. regulators and legislators to develop laws and regulations that would still protect the public while reducing U.S. auditors’ liability and supporting audit quality, and inform the international accounting community of the issues and solutions that could address a legal environment with increasing accountants’ liability.

In light of a litigious environment, CPA firms generally accept potential clients only after analyzing potential risks, 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 legal systems assuming that auditors can better absorb and control losses from misleading financial statements than can financial statement users. Auditors often increase their fees to insure themselves against potential liabilities. Although they were culpable, 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?

The Public Company Accounting Oversight Board (PCAOB) recently issued an Exposure Draft that would require auditors of issuers to expand significantly their audit reports beyond the current Pass/Fail standards, which could increase audit firms’ disclosures and resultant liabilities. But European Union (EU) countries, such as the United Kingdom (UK), have adopted measures to limit, control, and otherwise minimize their independent (chartered) accountants’ legal liabilities. Examining U.S. federal and state plus EU and UK statutes regarding auditors’ liabilities, we suggest methods to protect the public while allowing accounting firms to thrive in these environments.

Authors

• Alan Reinstein, Wayne State University

• Carl Pacini, University of South Florida- St Petersburg

• Brian Patrick Green, University of Michigan-Dearborn