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Auditor Liability Reforms in UK and US: Who Benefits?
Tim Bush, Hermes Focus Asset Management Limited
Stella Fearnley, University of Portsmouth
Shyam Sunder, Yale School of Management
ABSTRACT. Many changes in audit liability regimes of US and UK have been implemented during the past decade. These include LLP status for audit firms, proportional liability and 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 regulation. What are the consequences of these changes? Will the auditors, who advocate these reforms, benefit from them? Will the investors benefit from them? We analyze the recent changes, and proposals for future changes, on the basis of available research. We find it difficult to establish a correspondence between the self-interest of the advocates of changes, and the observed and anticipated effects of such changes. We conclude that the debate on auditor liability should focus on analysis of evidence and possibly . greater reliance on market forces rather than regulatory intervention.
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