Law Times

LAW TIMES / MAY 12/19, 2008 FOCUS Accountants counting the cost of litigation risks CAs say status quo unworkable BY IAN HARVEY For Law Times the way damages are paid to plaintiffs, arguing the status quo is unworkable and could place public companies at risk through a shortage of auditors. Saying the current system is imposing too much risk on accountants who audit com- pany statements, the Institute of Chartered Accountants of Ontario is in the initial phase of a strategy to raise the public awareness of the issue and lobby for legislative change, under the banner of "CAs for Change." At the heart of the issue is O ntario's chartered ac- countants have launched a campaign to change Ontario's regime of joint and several liability, which they say exposes financial advisors to an unreasonable degree of legal liability in the event of a court award. ing jobs and in some cases assuming more senior posi- tions such as a partnership. Exacerbating the issue is that errors and omis- sions insurance is harder to get, with many carriers exiting the market, Varley says, forcing accountants to self-insure, which fur- ther increases the liability. The net result, says Toronto and Montreal, a boutique firm specializing in insurance law and pro- fessional and civil liabil- ity defence work, says the growth in the scope and size of frauds is putting the heat on her clients. "Accountants are under That edict holds that even if a defendant in a case is found to have contributed to just one per cent of the tort, they can be held to pay 100 per cent of the dam- ages, if the other parties have no funds or can't be found. Peter Varley, vice president of public affairs at the ICAO, says the risk of liability is deterring qualified and competent ac- countants from taking on audit- Varley, is that more pub- lic companies may find it harder to retain auditing services, making it difficult for them to not only remain compliant with securities regulators but also to grow or manage their businesses. What the CAs want is something in line with other jurisdictions which have in- stituted a "proportionate li- ability" scheme, one which sets damages at a level pro- portionate to the role the de- fendant played in the tort. "We're not saying we pressure to settle in cases whether they are the au- ditors and there has been fraud they didn't detect," she says. "They know if they go to trial they could end up paying 100 per cent of the damages even if they were only responsible for 10 per cent." Steven Sofer says the chartered accoun- tants are on the right track with their campaign, especially given the gaining popularity of class action suits. shouldn't be held liable or pay damages if there is wrongdoing," says Varley. "Absolutely not. We're saying the penalty should be pro- portionate to the involvement." The campaign is one of many being raised in several jurisdictions here in North America and in Europe. Driv- ing the demand for change are a variety of factors, among them increased scrutiny of corporate governance legislation and the growing popularity of class ac- tion suits against companies by ever-vigilant shareholders. Varley says the campaign hasn't yet led to any face-to- face meetings with the Ontario attorney general, but there has been positive feedback. Mindy Paskell-Mede of Nicholl Paskell-Mede based in through hoops to qualify as an auditor of a public compa- ny," she says. "And some com- panies may feel it's not worth it, especially given the cost of in- surance, which is driving up the cost of audits and the risk." With fewer auditors to choose The upshot is that au- diting is being done by fewer firms, leaving the big four financial guns with less competition and mak- ing it tougher for publicly traded companies to stay compliant. "You have to jump from, public companies may also find choices limited because their audit firm can't have any conflicts with their competitors and can't provide business con- sulting or other services. It's part of a global trend, she says, and has resulted in changes in the U.S., where in some ju- risdictions judges decide at the outset the level of each defen- dant's exposure under a process of comparative liability. "It [joint and several liabil- leur Henderson LLP says the CAs are on the right track with their campaign, especially given the gaining popularity of class action suits. ity] is really having an impact," she says. "What will happen if we lose another big firm like we lost Arthur Andersen?" Steven Sofer at Gowling Laf- "I think they're 100 per cent right in the way they are going about it," says Sofer. Auditors are limited in what they can glean from the books, he says, and if there's out-and-out fraud it's likely the perpetrators have covered their tracks well. "Auditors aren't blood- PAGE 11 hounds. You expect them to catch the obvious, but they are limited," he says. The questions around who pays what are bleeding into many other industries, he says, pointing to the pharmaceutical sector, where some companies are threatening to stop pro- ducing vaccines if they aren't protected from liability. 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