More mail than I ever expected from Monday's posting about the capping of auditor liability in audit client arrangements. This one's from Mark M., a former Big Four partner:

"I believe a point is being missed here. The cap only applies to the Company itself suing the auditors, not to third parties doing so. In effect, the attention in the engagement letters is apparently being directed at companies who make mistakes, intentionally or unintentionally, and then sue the auditors for their own mistakes. This does appear to be an area where some tightening is warranted in the interest of fairness.

As a former Big 4 audit partner, this issue would have no affect on my perceived audit risk due to the specter of the responsibilites to third parties. In general, a real disservice is done to auditors by the notion that the risk of litigation is the only thing standing in the way of auditors abdicating their responsibilities. This is frankly ludicrous. All auditors want to do a good job and, between the internal QC reviews and SEC oversight, all know there are plenty of people looking over their shoulders. I am convinced that the inclusion of such provisions will have no effect on the quality of audits."

Excellent point: this is an arrangement between auditor and firm, not shareholder and auditor. There'd still be a legal avenue available to shareholders in the event of an audit failure where the auditor was culpable. And I'd agree that management is the one party that's primarily responsible to shareholders for management's faults and errors.



At the same time, there's the problem of perceptions. I appreciate the fact that auditors don't usually set out to do a crummy job, and that they know there's plenty of regulatory menace waiting if they fall off their tightrope. And I believe that the system has improved, and is producing far better results than it did just three or four years ago. (Despite news like this. I haven't gotten hold of the report yet; any PwC'ers out there care to share it?) I agree that it isn't fair to paint all auditors badly, as Mark suggests has happened.



But - auditing is a tough business, because perceptions count in auditing more than in any other profession. That's why independence in appearance is just as important as independence in fact. That's where the profession went off the rails in the 1990's with client consulting arrangements - they badly damaged the appearance of auditor independence, if not in fact. Seeking caps on liability doesn't do much to make the public at large think that the auditing profession has moved their image (their appearance) from being lap dogs to being shareholder allies.