The Center for Audit Quality has sent a letter to the Treasury Department's Advisory Committee on the Auditing Profession warning that it has not taken sufficient steps to safeguard against the risk of "catastrophic litigation" to auditors.
CAQ executive director Cindy Fornelli (pictured) wrote that the committee's second draft report was a step forward from the initial draft report, but she expressed her concerns that the committee had not paid sufficient attention to liability risks.
"We are disappointed that the second draft report still does not address comprehensively the catastrophic litigation threat faced by the auditing profession," she wrote. "In the second draft report, the committee has characterized the serious litigation risk facing audit firms as 'real' and discussed past catastrophic litigation as well as the collapse of Arthur Andersen. But the second draft report does not contain even the limited litigation reforms discussed in the addendum: exclusive federal jurisdiction and a uniform standard of care."
She complained that the second draft report also did not consider any of the measures proposed by the CAQ in another recent letter, including appeal bond caps, appeals of denials of motions to dismiss, strengthened bankruptcy defenses, expanded availability of Section 461(f) trusts, a revised Rule 10b-5, and a liability caps system for audit firms.
She contended that catastrophic liability remains the single greatest threat to the auditing profession's sustainability.
"We fear that the committee may be swayed to inaction by arguments that link high audit quality to auditor liability and the notion that massive litigation exposure is in some way beneficial to the profession and to the capital markets and investors," wrote Fornelli. "To suggest that auditors will not perform well unless faced with unlimited liability is a totally unsupported assertion which does a disservice to the audit profession, investors and the capital markets. "
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