Ritchie on audit risk
Posted by Christie Malry on March 29, 2010 at 7:51 pm
Ritchie is fuming that there were no claims made against auditors in the High Court here in the UK in either 2007 or 2008.
Isn’t is staggering that not a single professional negligence claim was brought against auditors in 2007 or 2008? And that just 13 have been brought as a result of the massive collapse of the economy in 2008 - even when auditors gave no clue on concern in going concern warnings?
What does this say? That the balance of risk has shifted far too far in favour of the auditor? That all the nonsense about liability caps is just that? That the balance of power has shifted far too far in favour of the auditopr because it is now almost impossible to sue thjem unless a company has already failed?
All these things, I suggest.
So professional negligence claims are good now, are they? Queue Prem Sikka:
Company auditors, the private police force of capitalism, make millions of pounds in fees from company audits. And company audits are used to get easy access to senior management and sell a variety of consultancy services.
But fee dependence, weak laws and self-interest inevitably compromise impulses for penetrating audits. The inevitable outcome is worthless audit reports.
So, Sikka uses cases of professional negligence to prove that auditors are sloppy and Murphy uses a lack of cases of professional negligence to prove that auditors are sloppy. Clearly they cannot both be right. And, indeed, neither is.
Sikka first. There are thousands of listed companies across the globe. If Sikka is right, the fact that there were no negligence claims in the UK in those years is nothing short of miraculous. Indeed, it should be completely impossible. For his thesis to be credible, it must be capable of being disproved. And two clean years disproves it, totally.
Now Murphy. What do you do when the evidence looks like it's in danger of disproving your life's work? Why, you resort to a "dog that didn't bark" line of argument.
Yet Occam's razor suggests we should accept the simplest solution to a problem in preference to a more complex one. It's totally perverse to try to turn it into evidence of a conspiracy of under-regulation. Because there's no evidence to do otherwise, besides in the demented conspiracy theories of our favourite accounting madmen, we should take a lack of professional negligence claims at face value - that auditors are doing the job that they're there to do.
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No cases brought against auditors ? What about Stone & Rolls v Moore Stephens. HC 2007, through to HL 2009 ?
Here's the source [Reynolds Porter Chamberlain]. That's not to say that the media necessarily picked up the story correctly...
I note that Stone & Rolls brought their claim in the QBD, not the ChD, bu tthe gist was negligent audting leading to a failure to detect a fraud I would have thought this was bang on point for those who complain, albeit that I would have every sympathy for a commentator who took one glance at the judgments and thought better than to opine.
The RCP piece makes scant mention of auditing but refers to the many different functions of accountants, e.g., I fail to see how a claim for an alleged negligent share valuation can be said to be made against an auditor. Moreover, when it comes to the broad numbers, there is no acknowledgement of the increased emphasis on ADR which has led to far more claims being settled pre-action.