Heads in the Sand on Audit Profession Risk
For some time, we have been concerned about the viability of the auditing profession in the wake of mounting litigation. Audit firms are partnerships with little, if any, insurance or other sources of financing to pay adverse judgments. All users of financial statements, including both investors and companies, depend on a viable audit profession.
In the wake of growing evidence that there is a legitimate threat of further contraction of the profession, the European Commission recently proposed liability caps. However, a panel of experts assembled by our own Treasury Department is having trouble coming to terms with what to do about this problem or even to fully acknowledge the real risks to both the profession and our capital markets of uninsurable catastrophic liability risk. In a recent blog posting, Jim Peterson sums it up pretty well.
Did anyone really think that the endless chatter about saving the system of privately-provided audits for large global companies would come to anything?
If so, that fantasy was dispelled on June 3, in the closing minutes of the latest meeting of the U.S. Treasury's Advisory Committee on the Auditing Profession. In his summation, Co-Chairman Don Nicholaisen explicitly stated that, with an insubstantial exception, the Committee's recommendations "do not address catastrophic risk" of the loss of the Big Four.
Why not? The Committee's very mission is to "examine the sustainability of a strong and vibrant auditing profession."