Capping auditor liability: The German experience

Abstract

There are serious concerns in some Western countries that methods should be found to resolve what is commonly referred to as the auditing profession's liability crisis. A number of legislative-based proposals to limit auditors' liability have been suggested. However, anxiety has been voiced relating to the inherent uncertainties attached to such apparently untested reforms. In this respect it is interesting to note that for more than sixty years the German auditing profession has operated within a regulatory environment in which liability is restricted by a legislatively sanctioned universal cap. We document the German experience and consider whether their form of liability restricting mechanism can provide a contribution to the debate concerning the efficacy of proposals to reform auditor liability elsewhere. We draw attention to the fact that at this time when the auditing professions in other countries are campaigning for reductions in liability exposure, it is interesting to observe that the German auditing profession has recently campaigned for increases in exposure. We use this and related events to suggest that the German experience illustrates that it is unlikely that the liability crisis can be resolved by simply changing the legal basis upon which financial penalties for auditors are assessed. We argue that a necessary precursor to a redesign of penalty mechanisms is a need to obtain measured consensus concerning identification of the constituency of claimants that should have rights to pursue auditors in the courts. Such an identification process needs to be firmly based within a model of corporate governance which reflects what can reasonably be expected from and provided by the auditing profession. In this respect we support the application of the intermediate form of corporate governance which until relatively recently characterized the German system. Within this system auditors were ascribed a less influential role than was envisaged in Anglo-American traditions. This arose since they acted principally as information agents to an influential supervisory board rather than as shareholders' representatives.