Is there a case for limiting auditor’s liability in Malta?

Abstract

On 5 June 2008, the European Commission issued a recommendation concerning the limitation of the civil liability of statutory auditors and audit firms. This followed a number of studies and consultations mandated by the European Commission in reaction to strong representations received from auditors concerned with the increasing trend of litigation and lack of insurance cover, The Recommendation aims to protect the supply of statutory audits within European Capital markets by shielding audit firms from disproportionate liability claims. Although the Recommendation proposes three possible methods, each member state, including Malta, will be free to choose a method which best suits its legal environment. The Commission must be informed of the actions taken by member states in the light of this Recommendation by 5 June 2010. The objective of this paper is to evaluate the applicability of this Recommendation within the Maltese audit market. The paper will first discuss the notion of liability limitation itself, the impact of such limitation on audit quality, the relevance of insurability and market concentration as well as the impact on investors and companies. The rest of the paper will then evaluate the applicability of the three proposals suggested by the Recommendation. The findings of the paper are based on the results of e-mailed questionnaires filed by 36 participants comprising audit firms, listed companies, banks and insurances as well as twelve interviews carried out with a selection of the respondents.