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

Intense discussion by chartered accountants on the subject of contingency fees may at first sight appear to confirm Monty Python's image of the members of the profession as somewhat tedious figures of ridicule. How excited can anyone get about such a technical and academic issue? Not very, is the simple answer, for a consultation paper on this subject, published by the Chartered Accountants' Joint Ethics Committee received just 26 responses - and only one of these came from outside the profession.

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

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Beverley James: Accounts Payable

    £22,000 - £23,000: Beverley James: Are you looking for the opportunity to work...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower