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Jun 30, 2011 | #1
Auditors and Investors Paper
The aim of this article is to inform the reader of the legal developments which impact the liability of auditors within and outside the U.S.; to understand the rationale for changes in accounting practices; and to understand the consequences of allowing private anti-fraud claims.
In the 2010 case of Morrison vs. National Australia Bank, the U.S. Supreme Court limited the extraterritorial powers of the Security and Exchange Commission. This led to the dismissal of
many important claims against member firms outside the U.S. Then comes along the Dodd-
Frank Wall Street Reform and Consumer Protection Act.
Auditors oppose the Dodd-Frank act, which threatens to allow the United States and the S.E.C. to initiate claims on securities fraud taking place outside U.S. territory. The same act has authorized the S.E.C. to determine whether or not, and to what extent, private persons should be allowed to make such claims. The intent of the act is to protect investors and the integrity of the U.S. market from the security transactions conducted beyond the borders.
However, auditors oppose the steps of the Dodd-Frank act on the following grounds:
There is no need to expose the non U.S. counterparts of accounting firms to U.S. private
litigation. The former are under the extensive control of the accounting firms in the home
country, and below par auditing is easily detected and punished. There is no evidence of
any negligence to justify the need for private liability.
The U.S. stands to supersede the policies and regulative measures being imposed by other
countries by extending a private right of action under U.S. law. This is a threat to
jurisdiction which could affect cross border cooperation.
Extraterritorial private law suits can discourage investors because of increased costs and a
greater need for auditing services. This could further lead to decreased competition in the
Furthermore, auditors argue that litigation in catastrophic proportions could be avoided if the following conditions were to be met:
The S.E.C. needs to be more vigilant and needs to bring charges against auditing firms
and their partners upon acquiring knowledge of auditing and abetting frauds.
The U.S. auditing firms and their non U.S. counterparts must disclose the amount of
litigation they are being subjected to, as well as their funds, and sources of funds, to
cover such litigation.
The arguments posed by the auditors were branded to be selfish; that such arguments were
intended to protect themselves and not the interest of public company shareholders. But after everything is said and done the main issues remain: who should be liable for audit failures and how to run after them. In conclusion, it seems the only point of agreement is that the lack of regulation and enforcement cannot continue without expensive consequences.
Mckenna, F. Auditors Abandon Investors On Liability Limits.