I find this really rather amazing. Prem Sikka (who I made fun of here) has, via some very garbled and tortured logic, come up with an interesting idea.

Leave aside all his stuff about auditors being profit making companies, this silliness:

This enables directors and auditors, subject to shareholder approval, to negotiate limits to auditor liability, this makes it even harder to bring negligent auditors to book. The policy was first introduced in the US in the mid-1990s and played a key role in the Enron and WorldCom audit failures.

Enron bankrupted Andersens which is a strange outcome of a limit to auditor’s liability but still.

After he’s gone through all of the reasons why auditing isn’t good enough (some of which is even true) he then proposes a remarkably free market solution.

One possibility is to abolish the annual statutory audit and require all companies to have insurance cover equivalent to (say) twice the value of their assets so that defrauded stakeholders claims can be satisfied. £1.5bn can buy a lot of insurance cover and details would be publicly known. To minimise the risk of misinformation, laws would need to be changed to make all company directors personally liable for knowingly publishing misleading financial statements. Corporate laws will need to be strengthened to ensure that companies publish the required information. Of course, insurance companies need to assess the fraud risks and may use the services of accountancy firms to make assessments of corporate internal controls and fraud potential. It is extremely unlikely that, under these arrangements, accountancy firms would be able to deny any obligations to look for fraud and stakeholders will not have to put up with the pretensions of independent auditors.

Leave the actual number alone for a moment and think of the general proposal. In effect, make the market work, through the insurance companies, to make auditing better. It will remove the biggest problem, which is that Directors hire the auditors and thus auditors, while nominally working for the shareholders, are really working for those who sign the cheques.

Yes, yes, I’m sure there are problems here but I do like the idea of simply binning vast amounts of regulation and replacing them with a statutory requirement to purchase insurance. We can be certain that the self-interest of those providing the insurance would monitor what’s going on effectively.