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Recent years have witnessed increasing academic and professional debate over the equitable nature of auditor liability and the potential risk that a successful lawsuit against the auditor(s) could serve to bring down one of the major audit firms. As a result. Regulators in the European Union and Australia have enacted legislation limiting auditors' liability in order to ensure the viability of the audit market. The question arises as to whether these significant changes to the legal systems in the European Union and Australia would be deemed appropriate for implementation in South Africa.
Austria, Germany, Greece, Belgium, Slovenia and Australia have audit liability caps. Legislation whereby an agreement could be agreed upon between the company and the auditor has recently been introduced in the United Kingdom. In respect of the United Kingdom, Austria, Germany, Greece, Belgium and Slovenia, the introduction of legislation limiting the liability of the auditor has placed these countries in conformity with the recently finalised European Commission Recommendation on the civil liability of statutory auditors.
Australia introduced the Corporate Law Economic Reform Project (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9), which expanded the duties imposed on auditors and thereby increased auditors' potential exposure to greater claims of negligence by third parties. CLERP 9 became effective in July 2004. The Australian government introduced two measures in CLERP 9 to mitigate auditor liability: proportionate liability for pure economic loss arising from misleading or deceptive conduct; and a framework allowing for auditors to incorporate and thereby limit their liability through the corporate structure. The Australian government also legislated to allow for a national approach to a statutory cap for auditor liability through the Treasury Legislation Amendment (Professional Standards) Act 2004. The legislation limits losses between $1 million and $20 million AUD based on the fee for the service. The absolute maximum cap on liability is $75 million AUD.
The objective of this paper is to highlight two areas where the South African government needs to amend legislation as a matter of urgency. The first area deals with the...