Summary and Conclusion
The Big-Four CPA firm’s current legal liability environment seems ‘‘difficult,’’ especially because PCAOB standards include requiring different firms to do tax and other ancillary services than those who perform audits and mandatory or client-requested audit firm rotations. Potential dangers arise in empowering few CPA firms, and attracting and retaining talented CPAs upon seeing the demise and related financial ruin of the partners of another large failed audit firm.
Methods to limit liabilities include liability caps, governmental insurance, engagement letter, or other contract clauses to limit auditor’s liability to clients or to third parties, increased requirements to restrict legal standing to initiate civil cases, and moving to proportional liability. Sliding liability caps and proportional liability have the advantage of reducing auditor liability, while maintaining audit quality and industry capacity.
Differences between EU/U.K./Australian and U.S. legal systems include ‘‘loser pays’’ in unsuccessful civil trials, banning contingent fees, and a much lower ratio of available lawyers—U.S. policy makers should adopt key parts of other counties’ policies to sustain the profession’s long-term viability. Adopting U.K./EU/Australian methods provides ideas such as sliding liability caps and contract clauses to help both Big-Four and second-tier firms thrive for the foreseeable future. Also moving away from ‘‘joint and several’’ to ‘‘proportional’’ liability affects positively the profession’s capacity to reduce the publics’ ‘‘deep pockets’’ view of the profession. While the current contentious national environment impairs Congressional (but not PCAOB, SEC, or other regulatory) action on these matters, perhaps individual state legislatures and other regulators can implement many such provisions. While national action derives a single set of rules, state-by-state implementation would continue the current differences in legal matters facing CPA firms.
