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Implication to audit firm signing a liability limitation agreement with their audit clients.

The following are potential implications for the profession, of audit firms signing a liability limitation agreement with their audit clients.



Audit quality.

One of the main arguments against the use of such agreements is that audit quality could suffer as a result. The argument is that auditors could become less concerned with the quality of their work, in the knowledge that if there was a claim against them, the financial consequences are limited.

Value of the audit opinion.

As a consequence of the point above, many argue that users of the financial statements will place less reliance on the audit opinion, resulting in less credible financial statements.

Pressure on audit fees.

It is considered that firms may be under pressure from clients to reduce their audit fees. This is a response to the fact that if the audit firm has reduced its risk exposure, then the fee for providing the audit service should be reduced.



Competition in the audit market.

The ability to set a cap on auditor’s liability could distort the audit market. Bigger audit firms may have the ability to set a high cap, which creates a disadvantage to smaller audit firms.

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