Accountants haunted by liability fears

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THE SCALE of the suits taken out against Price Waterhouse and Ernst & Young will strike fear into the hearts of all in the accountancy profession, writes Roger Trapp.

Professional liability is perhaps the biggest issue now concerning accountants - particularly those in the so-called big six firms. The problem, as they see it, lies in the principle of joint and several liability, under which each partner is fully liable for all the damages in a case regardless of the cost.

Auditors are so worried about it that they are making reform of the law the price for accepting the wider auditing responsibilities being demanded by the public in the wake of the spectacular corporate collapses of recent years.

The rules of the Institute of Chartered Accountants require firms to demonstrate that they have taken reasonable steps to meet claims. This means having professional indemnity cover with insurers drawn from an approved list of about 50, led by Minet and Bowring, equivalent to two-and-a-half times their gross fee income. The minimum value for a sole practitioner is pounds 50,000.

This is not nearly enough to meet the claims made against the big firms. As a result, they make their own arrangements. The typical level of cover for the leading firms is about pounds 50m.

In the US, where the situation is regarded as particularly serious, the total value of claims facing the accountancy profession is said to be dollars 30bn (pounds 17bn), while last year the big six firms there spent just under a tenth of their accounting and auditing revenues - about pounds 230m - on settling and defending lawsuits. In an unusual show of co-operation, the leading firms have joined together to lobby for a change in the law that they claim was partly responsible for the collapse in 1990 of the seventh-largest US firm, Laventhol & Horwath.

In Britain, such figures are unavailable, but similar worries have prompted the institute to start preparing a paper for the Government arguing that the situation has worsened since the late Eighties. Meanwhile the system survives by litigants settling for a fraction of the value of their claims.

Auditors should have more responsibility for detecting fraud and be subject to an independent regulator, according to a report published by the institute yesterday. The report deals with the so-called audit expectations gap - the divide between what auditors do and what the public thinks they should do.

The report by the auditing research foundation of the institute's research board also recommends the extension of auditors' responsibility beyond shareholders to such groups as creditors. But the authors argue that this could happen only if the law were changed to prevent auditors bearing the total burden of liability irrespective of their degree of fault - a view shared by the institute.