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Enoch Yiu

Hong Kong accountants have submitted a report to the government proposing the introduction of a statutory cap to the maximum compensation to be paid out by a firm in the event of an audit failure.
'The cap would be set at a sufficiently high level, as it would be intended to safeguard against a disaster scenario and not to affect routine claims,'  Paul Winkelmann, chairman of the professional liability reform working group of the Hong Kong Institute of Certified Public Accountants (HKICPA), said.
'A cap set at a reasonably high level could also be perceived by the public as a sufficient deterrent against any drop in standards,' he  said.
The working group did not specify a level for the cap, but included a proposal that Hong Kong should adopt a system of proportional liability in which auditors would be responsible for the share of any losses they had caused, while others parties such as lawyers, sponsors and company management should pay for any losses they caused.
 It suggested the court could decide the proportion of liabilities due from each of the parties. 
'Auditors should take responsibility for their share of losses arising from company failures, but they should not take the responsibilities of others,' Winkelmann said.
The working group formed by a group of top accountants, chaired by Winkelmann, has spent a year collecting initial views from stakeholders and researching overseas markets in order to propose the reform.
The report said the financial crisis had lent urgency to the need for reform as more companies could collapse as a result of the poor economy and auditors were often seen as having deep pockets which made them a good target for compensation claims. 
The recent US$1 billion claim against audit firm Ernst & Young in relation to the collapse of electronics firm Akai was evidence of the risks faced by auditors, he said.
 Some stakeholders contacted by working group members were concerned that the proposed reform should not affect audit quality,  Winkelmann said, but this was unlikely to happen since auditors were highly regulated in terms of standards and quality. 
The working group also found that many stakeholders were not aware that there was little or no commercial insurance available in Hong Kong for large audit firms in respect of listed company audits.
On the mainland, the practice is that auditors are liable for damages in proportion to the degree of their fault in financial statements, and in addition there is a cap related to the amount of any misstatements in the financial statements.



Cap urged for audit failure payouts