Essay on Reasons for Limiting Auditors Liability

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One of the main reasons for limiting auditors liability is to decrease the risk of audit firm becoming bankrupt which will cause a general market disruption with potentially "adverse consequences for corporate governance in the U.S. and the rest of the world. Market disruptions may arise in case of a further reduction of the number of big audit firms as the audit market is already highly concentrated" (London Economics, 2006; US General Accounting Office, 2003). The outcome of this would cause complication for the auditor for audited firms.
A reduction in the quality of financial statements is a result of auditors liabilities being limited. This would be because they will not have to take full responsibility if claims are made against the firm. a loss of reputation will also be suffered.

The Institutional Shareholders’ Committee (ISC), which comprises the UK’s most powerful investor groups, issued a statement on auditor LLAs on June 30 – the same day that the FRC issued its guidance. The statement is available on the ISC’s website: www.institutionalshareholderscommittee.org.uk.
“This statement gives a very strong steer that the only basis of liability limitation which is acceptable to institutional shareholders is the proportionate approach,” says Michael McKersie, assistant director, capital markets at the Association of British Insurers (ABI), an ISC member. “In particular, the statement makes it clear that the idea of a monetary cap on liability is not acceptable.”
ISC members are also keen to emphasize that it is up to company directors to reach their own conclusions as to whether an LLA is appropriate for their particular company. “Our position is that a proportionate approach to liability limitation should be given a fair wind by shareholders if directors feel that it is the right thing to do,”

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