Johannesburg — THE risk of a huge lawsuit against one of the big four auditing firms as a result of the current global financial crisis has increased to such an extent that it could be a matter of time before another auditing firm collapses.

Bernard Agulhas, the newly appointed CEO of the Independent Regulatory Board of Auditors (Irba), says the collapse of any of the big auditing firms would have a devastating effect on local auditing firms, as the quality of auditing, for instance, would be severely compromised.

The big four auditing firms remaining are PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young .

Agulhas says the demise of one of the big four could, in addition to precipitating a drop in standards, also result in huge liability risks, which could make the profession less attractive.

Audit liability means that partners in auditing firms are liable on a joint and several basis for any claims arising from a successful action against the partnership.

This means that all partners, regardless of whether they had any involvement in the audit of a client, are liable personally for all of the losses arising, for example, from a negligence claim, including those arising from the action of others.

In practice, all auditing firms carry professional indemnity insurance cover, which is usually subject to a cap. Agulhas has convened a task force to look into the issue of capping liability for auditors in SA.

"However, it is questionable at this stage as to whether capping or proportional liability is the answer for the South African auditing profession," he says.

If the task force finds a model that is acceptable to the profession, Agulhas says that it will be put forward to the minister by way of an amendment to the Auditing Profession Act.

There are about 4300 registered auditors in SA.

However, Agulhas is uncertain at this stage as to whether there is a shortage of auditors. Private companies are excluded from the audit requirement under the Companies Bill. Only public companies fall under the audit requirement.

Agulhas says some auditing firms may have to consider their sustainability once the bill is passed into law. "Once the bill is passed into law, we will also be able to surmise as to whether there is in fact a skills shortage of auditors," he says.

He says some firms may change their business focus from auditing to that of other advisory services, such as bookkeeping and tax.

The South African Institute of Chartered Accountants (Saica) is in the process of changing the competency framework for chartered accountants. The regulator is trying to produce a chartered accountant who will not rely on part two of the qualifying examination in order to qualify.

However, Agulhas says that to be an auditor, candidates need to pass parts one and two of the examination.

"We are doing more research on the issue, particularly in regard as to whether Saica's proposals will have an effect on our qualification," he says.

The regulatory board is working with the JSE on new requirements for the auditing of listed companies. The JSE has proposed that any audit firm wishing to audit listed companies be registered by the JSE. Agulhas says the parties have agreed that the register will be done away with.

In its place, Irba has agreed to provide the JSE with details of any auditor who has failed an inspection or who been suspended due to a disciplinary hearing.

In September, audit regulators from 21 countries participated in the fourth meeting of the International Forum of Independent Regulators . The regulators were joined by delegations led by the global CEOs of the international networks from Deloitte, KPMG, and BDO for individual discussion with each firm regarding their quality monitoring arrangements. "We welcomed the dialogue with auditors taking place at international level," he says.