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
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The Independent Online
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.

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