Auditor liability their !oval and finane, This unit looks at the UK audit firms’ battle : Sealant : Mania, tesponsibility for clients who fail due to fraud 0 KX To Discuss these questions. any they ar tir 1 Why are auditors supposed to remain independent of the directors of the comp, oo Te auting, 2 Who pays an audit firm for its services? Do you think this could create any potential conflicts of interes CD Understanding the main points Read the article on the opposite page and say whether these statements are true (T) or false (F).. Identify the part of the article that gives this information. 1 The UK audit firms were trying to limit their financial risk. 2 The process was an easy one, 3 The outcome of their mission would be decided not only by the British regulators and investors, but also by French ones. By the end of the period described in the article, the auditors had achieved their goal. How the text is organised Read the article again and put these events in the correct sequence. a) The UK government issued a public consultation document on limit 5) The proposals ose aimitona fis’ ability ony afer agreement bya companys shareholders were not opposed by the investment community, ©) The next UK Companies Act allowed aut firms olin their ability to thei i of blame by shareholder resolution, once a year, Hiern" yrepertion 4) Ausitors had total financial responsi ther ents went bankrupt due to aud or negligence. €) The ICAEW gota legal opinion, and the FRC published ast of gudel company directors write legally satisfactory proposals to limit Suto! vad which they could put tothe shareholders athe anual general es {) The SEC raised objections to the changes, 2 2) Audit firms were permitted to become limited tality 1) Company directors became ansous about abit iitation : legal debate about whether they could cary out the Pemnited son abig i) The institutional investor community didnt agree with tn : consultation document and rejected it. ' government's ing auditors’ liability. ea oe 2 Y Partnerships, Oo 0 000 Scanned with CamScannerre Professional liability: Solution faces threat | by Robert Bruce A The arguments about auditor liability had run for decades. But every time a possible solution to the auditors’ prob- lem had been found. it had even- 5 tually been rejected. Now, the Intest attempt to allow UK audit firms to agree specific limits on their liability was in the hands of a US regulator. B__ The Securities & Exchange Com- 10 mission — which has jurisdiction over UK companies that are listed in the US or have raised money in US markets = objected that the proposed deal might not be in investors” interests. C Inthe past. if a company failed as the ult of negligence or fraud, the audi- ‘ors had sole financial responsibility. Ir seemed that no one else would se sued, no matter how guilty. The vditors were seen as having very

> AUDITOR LIABILITY of corporate failure, ‘There was a big | legal debate over whether directors ‘would be acting in the interests of | shareholders if they proposed a limita | «6 tion resolution.’ says Richard Benni= | son, Head of UK Audit at KPMG. HAs a result, the profession’s main body, the Institute of Chartered | Accountants of England & Wales 2» (ICAEW), stepped in to obtain a legal opinion. Then, to help persuade directors that this was the right course of action, the Financial Reporting~ Council (FRC) published guidance to 2s directors along with recommended ‘wording to be used in the proposed resolutions to their investors. This seemed to have solved the problem. It was at this point that the SEC arrived on the scene. The main US regulatory authority, aware of its jurisdiction over certain UK compa- nies, became anxious. It saw the possibility of conspiracies between 45 auditors and directors and objected that this would not be in investors” interests, J ‘The SEC fears a “cosy deal” between directors and auditors,” said so Mr Wyman, “But in UK legislation, it is an agreement between auditors and shareholders. It is not a “cosy deal” at all. Tis totally transparent. Everything, ‘was on hold once again. et 1 Inwhich two situations does the SEC have the right to object to certain legal matters affecting UK companies? 2 Why weren't the UK auditors happy about the degree of liability they heldin the case of failure of a company due to fraud or negligence? 3 Which country provided the model for limited lability partnerships in the UK? Under the new UK Companies Act, would al audit firms automatically benefit from liability limitation? 5 Whose interests did the company directors say they were trying to protect when they started to debate the changes to the Companies Act? 6 Which two UK financial organisations tried to provide a solution to these company directors’ problems? 7 What was the SEC concerned about when It opposed the act? Scanned with CamScannerUNIT7 =» AUDITOR LIABILITY EX word famities Complete the chart. |—relect [achieve implementatio proposal opposition EX Word partnerships ; ‘Match the verbs (1-8) with the phrases (ah) to make expressions similar to those in the article, 1 toachieve a) financial responsibility 2 to have jurisdiction b) proportional limitation of liability 3. tohave sole ©) aconsultation document 4 tocap ¢) over companies listed in the US 5 toissue @) aresolution 6 to propose f) ability 7 to puta proposal @) alegal opinion 8 toobtain h) tothe vote Understanding expressions Choose the best explanation for each word or phrase from the article. 1 hich has jurisdiction over (line 10) a) responsibility for a company’s financial management b) the official right and power to make decisions about something 2. ‘asthe result of negligence .” (lines 15-16) a) theft b) failure to take enough care over something that you are responsible for, for which you may have to pay damages i r fraud ..” (line 16) a) amethod of illegally getting money from a person or organisation b) stealing money from a company 4. ‘..no one else would be sued...’ (lines 18-19) a) fired b) taken to court 70 —_<_—_—— Scanned with CamScannerUNIT17 +» AUDITOR LIABILITY 5 ato be fait {0 become limited liability partnerships u (ines 32-33) 3) Partnerships in which individual partners are not held legally and financially Fesponsible for their defective audit opinions 5) partnerships in which individual partners are protected from the rsk of personal bankruptey if they are not personally responsible for a defective audit opinion ‘ona contractual basis... (line 45) 2) by temporary (renewable) agreement b) by permanent agreement 7 “There was a big legal debate over. (lines 61-62) a) illegal action 5) argument or discussion about a point of law text completion Use words and phrases from Exercises A-C to. complete paragraph. * oftheir|......2, They thought that it was The UK audit firms were trying to achieve proportional very unfair that they should have §.....0. sso: Poesoo? in the event of the failure of a company they had audited in the previous 12 months. The Companies Act allowed auditors to propose a liability row... to shareholders at a company’s annual general meeting. The resolution would not be permanent. b...se.d once a year. This solution had twould only be agreed by a company’s shareholders on a. /, provided by experts. However, the process been arrived at after much bev wcdoeweofand Abend. was stopped in its tracks once again. The US Stock Exchange Commission, which had}.......° over many large UK companies, objected to the idea. Word search Find phrases in the article which fit these meanings. was up to (somebody) to decide (paragraph A) were considered to have unlimited funds (paragraph C) it couldn't be continued (paragraph D) with many breaks in progress (paragraph E) to place a maximum limit on their liability (paragraph E) ‘a euphemism for conspiracy (paragraph )) anole 1 Do you think that audit firms should be totaly lable for a client company which fails due to fraud or negligence, or is auditors’ limited lability fair? Are there any potential risks in allowing the same accountancy firm to provide lucrative consultancy services to a company which it also audits? anewne Explain your opinions in a short talk. Do an online search to find out if there have been any developments in this story since this article was written. Write a short report. 71 Scanned with CamScanner