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Auditor Liability Reforms in the UK and the US: A Comparative Review

Listed author(s):
  • Tim Bush
  • Shyam Sunder
  • Stella Fearnley

The past decade has seen many changes in audit liability regimes of the US and the UK, and more may be on the way. These include LLP status for audit firms, proportional liability, and the introduction of various forms of liability caps through contract in engagement letters. These changes may affect audit quality, price and profitability, the organization of the market for audit services, as well as domestic and cross-national mechanisms for regulation of this market. What have been, or will be the consequences of these changes? Will the auditors, who advocate many of these reforms, benefit from them? Will the investors, who advocate other reforms, benefit from them? Answers to these questions are relevant to policy decisions at hand. We analyze the recent changes and the proposals for future changes on the basis of available research on the market for audit services, including some studies commissioned by regulators. We find it difficult to establish a correspondence between the self-interest of the advocates of various changes and the observed and anticipated effects of such changes. More evidence is needed to inform the debate in the corridors of power. Such evidence could be obtained by requiring audit firms to publish information about their true litigation costs. Moreover, the regulatory process might benefit from somewhat greater reliance on market forces.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2575.

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Date of creation: 01 Sep 2007
Handle: RePEc:ysm:somwrk:amz2575
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  1. John C. Coffee, 2005. "A Theory of Corporate Scandals: Why the USA and Europe Differ," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 198-211, Summer.
  2. Peter Moizer, 1992. "State of the art in audit market research," European Accounting Review, Taylor & Francis Journals, vol. 1(2), pages 333-348.
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