The Center for Audit Quality has sent a comment letter to the Treasury Department's Advisory Committee on the Auditing Profession recommending that it pay more attention to the litigation risk for audit firms.
The committee has been drawing up a set of recommendations for improving the audit profession that it will present to the Treasury Department. The draft report was released last month for comment (see Treasury Committee Suggests Professional Priorities). The CAQ, which is affiliated with the American Institute of CPAs, emphasized international considerations, litigation risks and the interaction among the various recommendations in the draft report.
CAQ executive director Cynthia Fornelli (pictured) urged the committee to develop recommendations that foster alignment of the U.S. and European capital markets as the U.S. faces increasing competition from abroad.
"Endorsing reforms that mitigate the threat of catastrophic litigation risk for the profession in the United States will also be critical to maintaining the health and vitality of the U.S. markets," she wrote. "To inadequately address the issue of catastrophic liability could disadvantage profoundly the U.S. capital markets, which increasingly compete with those in other countries."
She pointed out that the European Commission has already said in a report that the risks of unlimited joint and several liability could deter audit firms and networks from entering the international audit market. The current conditions are not only threatening the entry of new players, but also threatening existing firms.
"The data submitted by the firms make clear that the potential exposure faced by the firms from pending private actions far exceeds the firms' current financial ability to withstand liability from such exposure," Fornelli wrote.
She recommended that the committee use the data made available by the firms, including data regarding outstanding litigation claims, to support its conclusion that the threat of catastrophic litigation risks is real, and to recommend that policymakers and regulators act in response.
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