5.28A universal feature of these events is large numbers of depositors and investors being unable to reclaim their investment or deposit from the finance entity with which they contracted. Unless they can benefit from a government rescue, guarantee or other intervention, investors who have suffered loss become potential plaintiffs looking for a solvent defendant.
5.29The auditors of failed entities and, for finance companies, the corporate trustees are potential defendants and sometimes the only defendants with funds available to meet a claim. The question is whether these crises have increased the potential liability of auditors and others to such an extent that some sort of limitation on their liability is justified, whether by proportionate liability, caps on liability or some other method.
5.31Concern nevertheless persists in the industry. Practitioners continue to suggest that even the prospect of such liability discourages individual auditors or firms from entering or staying in the field. It is argued that mid-level firms may be deterred from taking on larger audits, professional indemnity insurance becomes too expensive or unobtainable; and auditors may refuse to undertake the riskiest assignments.
5.32As we discuss in Chapter 6, developments elsewhere are relevant. Auditors and some other professional advisers in Australian states now enjoy statutorily sanctioned schemes that cap their liability. Auditors covered by such a scheme have their liability capped at $1,000,000 for smaller assignment, or at ten times the fees earned for large assignments, with a maximum cap of $75 million. As part of the scheme, each participant must have professional indemnity insurance up to the level of the cap, or have sufficient proven assets to meet claims. We invite submissions as to whether New Zealand should allow similar arrangements; and if so, whether the Australian limitations are reasonable.
5.33The scope of any cap would also need to be determined. Even if limitations on liability are considered necessary to mitigate the most severe effects of liability for financial collapse, some exceptions to these caps may be appropriate. For reasons of principle and efficiency we consider that that any cap on liability should not be available in cases of deliberate misfeasance such as fraud. There is however a secondary issue as to whether or how often professional advisers are likely to be liable for losses in the “catastrophic” range, in the absence of deliberate misfeasance.