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Top investors slam EU plans to “protect” auditors

European Union plans to limit how much investors can sue auditors for will encourage accountants to take shortcuts and harm standards, a group of heavyweight investors said on Monday.

The International Corporate Governance Network, a global group of institutional and private investors overseeing assets worth $15 trillion, said the EU measure would fail to boost competition in auditing. Four companies audit the bulk of the world’s blue chips.

EU Internal Market Commissioner, Charlie McCreevy, published a recommendation or non-binding guidelines for EU states in June that would allow them to limit the civil liability of auditors in order to encourage new companies to enter the sector. He left it up to each EU state to decide on a method for limiting liability in response to an increasing trend of litigation and insufficient insurance in the sector. “The ICGN appreciates the recommendation continues to allow member states to apply proportionate liability as the way forward,” the group said in a letter to McCreevy and EU Competition Commissioner Neelie Kroes, made available to the press.

McCreevy has ignored the investment community’s opposition to a quantitative cap, the letter said. “We advised that limiting auditor liability would reduce audit firm accountability, provide a market incentive to take audit shortcuts, and reduce overall audit quality,” it said. The guidelines will “protect the community of auditors, particularly the larger ones, to the detriment of other stakeholders and especially shareholders,” the letter said. With existing auditors becoming more protected, the ICGN urged the EU executive to step up efforts to ensure the market for audit services in Europe becomes more competitive and more focused on audit quality. The ICGN wants Brussels to put forward initiatives to boost transparency and public disclosures in the auditing sector.

Until 1989 there were eight large international auditing firms -- Arthur Andersen, Arthur Young & Company, Coopers & Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Peat Marwick Mitchell, Price Waterhouse and Touche Ross. After a series of mergers and an accounting scandal involving Arthur Andersen in the wake of the collapse of the US energy trader Enron there are now only four -- PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG.

Members of the ICGN include the Association of British Insurers, the largest US pension fund Calpers and Dutch ABP, the world’s third biggest state pension fund. (Reuters)