Insights into the Significance of Insurance Protection for Audit Firms

The entire auditing processes, right from assessment through to audit procedures and audit declaration, is always subject to professional, ethical and integrity considerations. The actual or presumed breach of any of these principles exposes auditors to risks of litigation or class-action lawsuits by clients, corporate governance institutions and other organizational stakeholders. It is for this reason that firms are keen to tap the benefits of audit protection insurance.

Why embrace auditing contingency measures?

Risks, whether foreseen or unforeseen, always lurk around business processes, and auditing firms are no exception. Auditing is indeed a sensitive profession that is charged with the responsibility of interrogating the sincerity capacity of companies and organizations entrusted with custodial responsibilities over public or private resources in the form of investments and voted expenditures. And it goes without saying that the auditors are always in the firing line, in terms of risks to personal life, job loses or court cases.

Insurance coverage always comes in handy when an auditing process become subject to conflicts either from the clients, investors, or regulatory bodies. For instance, an auditor could easily get entrapped in the web of court cases triggered by knowing or unknowingly issuing a qualified opinion over fraud-laden financial report. Therefore, audit protection insurance goes a long way in preserving self confidence and professional commitment of members of auditing teams.

What are the individual and collective culpabilities of Auditors and audit firms?

The scope of culpabilities for an auditor and audit firm depends on the nature of breach at hand. Whereas an auditor bears individual culpability for personal incompetence or collusion with clients, audit firms are usually roped in as well. Indeed, an audit firm risks to pay a price of fines and bad publicity if found to have failed in rein in its rogue personnel.

There are also circumstances when an audit firm can be ordered by a court to pay a suing client a lot of money in compensation over a case such as misrepresentation of facts in an audit report.  Such consequences can irredeemably destroy an audit firm’s reputation and drain its financial muscles, unless it has in place audit protection insurance to help mitigate against the impact of hefty fines and legal expenses.

Drawing lessons from past industry experiences

Such eventualities are best illustrated by past cases studies of audit firms that were either held accountable for the collapse of their corporate clients. For example, Arthur Andersen auditing firm was whittled down by class-action lawsuits over accusations of abetting multiyear fraud amounting $4 billion when it audited of WorldCom’s financial accounts.

In 2002, PricewaterhouseCoopers LLC (PwC) similarly found itself on the receiving end when one of its leading clients, Tyco International Ltd., collapsed due to financial embezzlement.  An inquiry found out that PwC’s engagement partner, Richard Scalzo, had colluded with Tyco’s management to issue unqualified opinions on the company’s fraudulent financial reports between 1997 and 2001, a professional misconduct that earned him permanent ban from practicing auditing.

Therefore, these examples show that there are no limits to culpability to fraud in financial reporting for auditors and audit firms, regardless of their brand name, size of operational infrastructure or influence in the industry. And this should sound as a warning bell for auditors and audit firms that feel they are too big to enlist for insurance protection services.

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