Accountancy and Management: When being the auditor can be a liability: Roger Trapp reports on fears that expensive negligence lawsuits could cross the Atlantic

IT HAS long been said that what happens in the United States will reach Britain five years later. Usually, the dictum is summoned in a threatening manner to refer to race riots, drug plagues and the like. But for some time now, those in the professions have been talking with the same foreboding about liability in law suits.

Doctors and accountants have generally been most concerned. However, anybody who could potentially be sued for negligence in the way he or she carried out his or her business has been casting nervous glances across the Atlantic.

Visions have been conjured of a land of aggressive 'ambulance-chasing' lawyers acting on a contingency, no-win, no-fee basis, where class actions are the order of the day and juries hand out telephone-number damages awards.

Although there are instances of exaggeration, this portrait has more than a little basis in fact. Until recently, the medical profession has borne the brunt of the practice, but accountancy firms are feeling increasingly at risk.

According to a position paper put out by the big six firms last month, their expenditure on settling and defending lawsuits in the US rose 18 per cent in 1991, to dollars 477m ( pounds 235m), which accounted for 9 per cent of their auditing and accounting revenues in the country.

While other factors were involved, the liability burden was the overriding reason behind the collapse in 1990 of Laventhol & Horwath, the seventh-largest firm. These costs, combined with some large judgments and settlements, have fuelled speculation about the survival of even the largest firms, the paper continues.

Now the firms have banded together to get something done. Their campaign calls for a fundamental reform of the 'out of control' tort liability system in America.

But more serious as the situation undoubtedly is there, the problem is not confined to the United States. For years, British accountants - and other professionals - have been voicing their concerns. However, apart from sympathetic noises from high places, little appears to have been done. It is as an attempt to return the subject to the public arena that Brandon Gough, senior partner of the country's biggest firm, Coopers & Lybrand, has - in a speech to this year's conference of the Institute of Chartered Accountants and in an article in the Independent - made a link between liability and widening the scope of the company audit as envisaged by the Cadbury report.

While accepting that there are opportunities available to accountants ready to satisfy the public interest by expanding the remit of the audit, he maintains that this entails moving into areas where judgment can be easily challenged. 'And you can't do it if it's going to jack up the risk because there's not much room for that.'

The answer, he says, in common with the Americans, is to attack the concept of joint and several liability, which makes each defendant fully liable for all the damages in a case, regardless of the degree of fault. In practice, this means a company's auditors are generally brought into a case in which fraud is alleged because - in the words of Roy Chapman, UK managing partner of Arthur Andersen, 'it is perceived that they are insured and have deep pockets'.

This perception also gives rise to what Mr Gough terms 'a kind of greenmail' whereby firms are induced to make settlements to avoid the punitive cost of taking claims to court.

Although they, along with senior partners at the other leading firms, draw distinctions between the British system and what one described as the 'vicious' situation in the United States, they are encouraged by the moves made by their counterparts across the water.

The absence, for now, of contingency fees, combined with the principle of the loser paying the winner's costs, does make greenmail-type tactics less attractive in Britain. In addition, the Caparo judgment limits the number of people who can sue an auditor. But a trend towards litigation has already produced some big payouts, notably by Peat Marwick over Ferranti, and is putting pressure on insurance cover.

A decade ago liability insurance was taken out on the basis that the risk of needing it was remote and the premium was correspondingly low, Mr Gough said. 'Now it is very difficult to obtain in large amounts and very expensive.'

It is reckoned that a firm's cover only extends to about pounds 50m - which was a lot of money 10 years ago, but today pales in comparison with the value of modern takeover bids. Anything above this figure, a firm has to find itself.

Top of the US recommendations for reform is the replacement of joint and several liability with proportionate liability, whereby the court bases the award of damages against a particular defendant on his degree of fault. But since this is complex to administer there is also support for such notions as using a multiple of fees or a fixed sum to limit the amount of damages.

But with the Bank of Credit and Commerce International and Maxwell affairs threatening to unleash a torrent of lawsuits, anything that reduces the likelihood and cost of legal action is sure to be welcomed. And for once auditors are looking to America in hope rather than in fear.

Meanwhile, many in the large firms are likely to share the sentiments of Mr Chapman. 'The prospect of losing your life savings for a case with which you have nothing to do - which for the most part is the case - is too high a price to pay.'

(Photograph omitted)

News
people Emma Watson addresses celebrity nude photo leak
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
News
Boris Johnson may be manoeuvring to succeed David Cameron
i100
News
His band Survivor was due to resume touring this month
PROMOTED VIDEO
News
people'It can last and it's terrifying'
News
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
science
Arts and Entertainment
tv
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Life and Style
fashionPart of 'best-selling' Demeter scent range
News
ebooksAn unforgettable anthology of contemporary reportage
News
i100
Sport
Tom Cleverley
footballLoan move comes 17 hours after close of transfer window
Sport
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
footballRadamel Falcao and Diego Costa head record £835m influx
Life and Style
fashionAngelina Jolie's wedding dressed revealed
News
i100
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.

iJobs Job Widget
iJobs Money & Business

Executive Assistant/Events Coordinator - Old Street, London

£35000 - £38000 per annum + benefits: Ashdown Group: Executive Assistant/Event...

HR Generalist (standalone) - Tunbridge Wells - £32,000

£30000 - £32000 per annum: Ashdown Group: HR Generalist (standalone) - Tunbrid...

Derivatives Risk Commodities Business Analyst /Market Risk

£600 - £800 per day: Harrington Starr: Derivatives Risk Commodities Business A...

Power & Gas Business Analyst / Subject Matter Expert - Contract

£600 - £800 per day: Harrington Starr: Power & Gas Business Analyst/Subject Ma...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering