Limiting Auditors’ Liability: The Case for (and Against) EU Intervention

Abstract

This paper addresses auditors’ liability in the light of the current competition problems in the market for statutory audits and actions taken by the European Commission. First, it will be explained that there is a lack of competition in the market for audits of large and quoted companies. Middle-tier firms are not willing to enter this market, inter alia, because of high litigation risks and problems in the insurance market. Second, Commission Recommendation 2008/437 will be analysed from an economic perspective. Interestingly, the Commission suggests various options for limiting liability, but leaves the choice between those instruments to Member States. The need to limit auditors’ liability will be addressed in the context of the economic theory of regulation, with a focus on the European context. The central question, therefore, is whether there is a need for the EU to intervene and whether the existing Recommendation is the right instrument.