Auditors: Market concentration and their role - Economic Affairs Committee Contents


Supplementary memorandum by Mr Jonathan Hayward, Independent Audit Limited (ADT 14)

  Following the Committee session at which I gave evidence, I would like to make one point regarding financial statements insurance.

  While this is at first sight an interesting and potentially attractive idea, I am not convinced that it would work in this country. What follows is expressed somewhat tentatively, since I am not a lawyer, but if the Committee were to consider pursuing the idea of financial statements insurance then I would suggest that you first obtain proper legal advice on this point.

  The idea of financial statements originates from the USA where the system of law and regulation is directed and maintaining an orderly secondary market. The purpose of financial statements in that jurisdiction is primarily to enable secondary market transactions to take place at well-informed prices, which facilitates litigation against companies whose accounts are misstated since litigants need only show that they suffered loss through dealing at a price which was based on incorrect information. In this country, the legal framework for corporate reporting is based on the idea of accountability to shareholders, and as a general rule legal action by shareholders against directors and auditors arises when the company itself has suffered loss.

  Claims against companies in the UK because unsatisfactory information has affected dealing prices in the secondary market are extremely rare.

  I understand, however, that it is such claims that underpin the idea of financial statements insurance. So if financial statements insurance were to be introduced into this country, making it effective would necessitate a change in the legal framework to enable investors to bring claims much more easily against companies whose accounts were misstated.

  This would be a significant change which would be viewed by many as a severely retrograde step.

29 October 2010



 
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