Why firms are still liable to pay dearly

A study on proportional liability offers little hope for quick reforms, says

There was an almost palpable sense of let-down when the Department of Trade and Industry last week published a Law Commission feasibility study on reform of the principle of joint and several liability.

Though the principle affects other professionals, such as solicitors, architects and actuaries, auditors have been at the forefront of attempts to amend the law under which they can be held liable for a total loss even if only partly to blame simply because they have been closest to the firing line. The spate of corporate collapses at the turn of the decade left many victims keen to exact revenge, and auditors (thanks to the perception that their firm's insurance cover gives them deep pockets) were seen as the obvious targets.

Initially, many of these lawsuits either came to nothing or were quietly settled. Then the size of the claims created an insurance crisis, and total cover became unattainable at any price. Firms began to claim they faced a situation like one in the US which had claimed one leading firm. As the Institute of Chartered Accountants and the leading firms opened campaigns for reform, we were reliably informed that as much as a tenth of annual revenues went on dealing with these claims.

It seemed a forlorn case - even to its proponents - and the firms quietly began looking at other ways of protecting themselves from such claims as that for $8bn against Price Waterhouse and Ernst & Young over the collapse of BCCI. But just as this was culminating in KPMG's decision to incorporate its audit division and PW and E&Y's moves to set up limited liability partnerships in Jersey, a chain of events suddenly began to raise hopes.

In the highly litigious US, legislation was passed to introduce proportional liability, while in the UK just before Christmas, a case that few people even knew was going on ended with the partners of Binder Hamlyn, one of the leading practices until its merger with Arthur Andersen a year before, facing ruin because of insufficient insurance cover. Coupling these two developments with sympathetic noises from the Government, the accountancy profession lulled itself into believing that what it had thought was impossible was about to happen.

In the end, it was left with only crumbs of comfort. Amid the dismay at the Law Commission's conclusion in its report that proportionate liability was not worthy of a full-scale investigation, there was a welcome for the DTI's decision to carry out a consultation exercise on the matter.

For instance, Ian Brindle, senior partner of Price Waterhouse, is disappointed that the commission does not believe there is a "convincing argument for replacing joint and several liability with full proportionate liability". But he adds: "It is good to see that reform of the Companies Act, for which we have lobbied so long, has the support, albeit tentative, of the Law Commission."

His point, that the commission considers that reform of section 310 of the 1985 Act might be justified, is also picked up by Gerry Acher, head of audit at KPMG. Meanwhile, Peter Smith, chairman of Coopers & Lybrand, welcomes the fact that the questionnaire which forms part of the consultation paper raises the idea of introducing effective limited liability partnerships in the UK.

But anybody who thinks these firms are going to sit around waiting for legislation is likely to be taken by surprise by forthcoming developments. Mr Brindle says: "We will continue to work with the Jersey government to draft a new law that would permit the setting up of a limited liability partnership on the island." It seems there initial scepticism about the speed of change was well placed.