Study On The Recent Development Of Auditors' Liability And Audit Risk Management

Apart from breeding the supranational Sarbanes-Oxley Act of 2002 > Corporate scandals in United States have urged governments of other countries to proceed reforms. Reforms increase professional liabilities and legal liabilities of the accountants. This thesis investigates the following developments:Firstly, accountants have to add "disclaimer" in audit reports after the "Bannerman Case" for expressing their intention to have liability exemption clearly. Otherwise absence of disclaimer will become one of the bases of judgment and increase the probability of losing the lawsuit, thus increase risk. Although "disclaimer" can avoid extension of audit liabilities unfairly to third parties other than shareholders, adoption of disclaimer is not common for not mandatory. Lots of practices are anxious for the objection from clients. Improvement in this situation depends on the promotion from the institutes for the profession to explain clearly to the public.Secondly, audit liability cap can mitigate legal liabilities of accountants. Practices can affirm the maximum amount of compensation, the cap for risk when facing serious litigations. They can assess whether they can accept the audit engagements of listed companies accordingly. Thus promoting competition in the profession and making the insurance companies accept the audit liability insurance. On 7th September 2004, audit liability cap vanished after the United Kingdom had announced not to make audit liability cap. United Kingdom and Hong Kong are striving for proportionate liability now for mitigating legal liabilities of accountants. Under proportionate liability, accountants pay compensation according to the ratio of their faults. They need not bear legal liabilities caused by mistakes of others, for example, directors. They only have full responsibility for their own wrong behavior.Thirdly, The Limited Liability Partnership Act of United Kingdom has been effective since 6~th April 2001. The "Big Four" CPA firms registered as limited liability partnership (LLP) on 1st August 2003. Some medium sized CPA firms followed the "Big Four". LLP marks the beginning of the profession in United Kingdom getting fair and reasonable protection. Under proportionate liability, partners not involved directly in litigation for negligent claims need not bear joint and several liabilities. This protection reduces legal liabilities and risk. Nevertheless bankers often require members of small practices to provide personal guarantee for facilities granted. As a result, the personal liabilities of members are same with "partners" of ordinary partnerships in essence. Therefore it is not suitable for all practices to transfer into LLP. However, for big practices and those newly incorporated, already dissolved and merged, should determine whether to transfer into LLP or not after considering carefully the advantages and disadvantages of LLP;Finally, main audit risks brought by reforms in countries are: risks of delivering audit working papers; lowering audit quality due to abandonment of non-audit services and mandatory rotation of audit firms or audit partners which increases initial cost; strengthening financial disclosures and increasing professional liabilities; and criminal punishment.For the risks discussed in this thesis, practices can adopt the following risk prevention policies: (1) add disclaimer in audit reports; (2) fix the liability cap in engagement letters with clients for non-statutory audit and non-audit services for negligence claim and breach of contractual liabilities; fix the liability cap in independent engagement letters with third parties for negligence claim and breach of contractual liabilities; (3) establish policies and procedures for delivering audit working papers; maintain control of original audit working papers for ensuring completeness and genuineness of audit working papers; (4) lower audit risk by organizational structure of practices; (5) establish risk-prevention system, including maintenance of independence, careful choice of clients, clear definition of sc...