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AUDIT MARKET FAILURE Benedikt Koehler The auditing profession has called for the current regime of unlimited liability to be replaced with liability caps. The Department of Trade and Industry has tabled proposals to reform the structure of the market for audit services. These proposals fall short of meeting the demand for liability limitation but modify he current regime inasmuch as auditor liability, though uncapped, would be proportional to the damage caused by audit failure. This step is unlikely to remedy audit market failure. This article argues the distortion of market ncentives in audit markets can be traced to government intervention and the remedy lies in replacing government intervention with competition. Introduction Proponents of audit liability reform argue that the current weight of obligations is untenable. A regime of unlimited liability, coupled with the doctrine of joint and several liability, implies that every corporate insolvency can trigger litigation by plaintiffs arguing that auditors are culpable for not spotting trouble in time. Worse, auditors can not only be held to account by a company’s management, but by third parties as well. Auditors feel that providing an audit opinion in effect is tantamount to underwriting the solvency of their clients. The General Accounting Office (GAO) finds in a survey of corporate failures that auditors had qualified their opinion in only half of all cases. Therein lies the crux. Auditors attest whether a company’s accounts are drawn up in accordance with auditing standards. That is not the same thing as to vouch for a company’s solvency. Auditors argue it is wrong to conflate audit failure and corporate failure. In 1992 the Big Six US auditors stated that without checks to third-party litigation, it would only be a question of time until their number dwindled (Arthur Andersen et al., 1992). US legislation passed in 1995 set hurdles for filing claims and for a while seemed to stem the tide of litigation.