opinion: You save your client millions. Your reward: a lower fee. Isn't there something amiss?
If the accountant finds nothing, he gets a premium. It is as if a judge were paid for each innocent verdict
Wednesday 27 September 1995
Yet the subject of contingency fees for accountants has some serious contemporary relevance that surely should invite interest from within, and without, the profession. This is because it strikes at the very heart of the concept of professional independence and self-regulation.
Apart from acting as auditors, chartered accountants frequently carry out the role of "investigating accountants" on corporate transactions. They investigate and report, for example, on possible management buyouts, on companies proposed for flotation and on companies considered for takeover. This work is known as "due diligence" and is intended to provide independent, hardheaded and objective facts and professional opinions, which can temper the excitement of the corporate financier or potential acquirer who can sometimes be prepared to do the deal at any price. Increasingly, however, the investigating accountant has been asked to work on the basis of a contingency fee, which turns conventional logic on its head. If the accountant uncovers the problem that frustrates the deal, he doesn't get paid, or gets paid a much reduced fee. If he finds nothing, he gets a premium. It is rather as if the judge in court were paid a premium for each innocent verdict or a policeman received a prize for every crime not solved.
The Chartered Accountants' Joint Ethics Committee (Cajec) charged with the brief of safeguarding ethical standards has understandably been considering this issue long and hard. An initial Green Paper inviting comments was issued on this subject in 1994 and it was this that received just 26 replies. In July 1995, another consultation paper was issued inviting responses by August 1995. It is to be hoped that this has aroused more interest.
It might be expected that Cajec would find a simple solution, defining contingency fees and then insisting they be prohibited in all circumstances. Yet life is not that simple. The corporate finance departments of major accounting firms wish to be able to work (on substantial contingency fees) on jobs where their investigating accountant colleagues are also undertaking due diligence - even though this creates an inevitable and professional conflict of interest, as the firm will now have a material interest to make the deal happen, come what may.
Accountants wishing to grease the wheels of a transaction have suggested that a material discount for a non-completed deal should not be covered by the rules - even though the effect is identical to a contingency fee. Firms undertaking substantial due diligence for sophisticated acquisitive clients or financial institutions have asked to be excused from the rules (as their clients know the risk) - a curious clause is then to be included in the due diligence report, specifying that the report cannot be relied upon to be objective etc.
Why is life not kept simple with a straightforward prohibition of direct or indirect contingency fees in all its guises, whenever due diligence is involved and independence is required? The answer may lie in the inherent conflict between commercial self-interest and ethical purity, which inevitably results from self-regulation by the accountancy profession of its own standards. We consequently see attempts to reconcile the irreconcilable, to square the circle. This is well illustrated by the proposals contained in the latest, well-meaning, Cajec consultation paper on contingency fees which proposes to accommodate all of the commercially self-interested exceptions given above.
Where is this all leading? Perhaps the accounting profession will realise that unless it unambiguously puts its own house in order, matters may ultimately be taken out of its hands and self-regulation brought to an end. The issue of contingency fees is an important and topical test of ethical resolve, as it constitutes a "fault line" where professional standards and commercial self-interest can be seen to collide. It will be interesting to see whether an earthquake follows.
The author is a partner and national director of corporate advisory services at chartered accountants Pannell Kerr Forster.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
My Tinder date asked for a refund when I declined a second meet up
Number of parents moving to their desired school catchment area is increasing, according to Santander research
Bank-beating exchange rates on your international payments
Be warned of the dirty tricks the bailiffs pull
- 1 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
- 2 If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
- 3 Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
- 4 Make your voice heard: Sign The Independent's petition to welcome refugees
- 5 Refugee crisis: Aylan's life was full of fear - in death, he is part of 'humanity washed ashore'
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
Day In a Page
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.