Accountants rush for protection

ROGER TRAPP and

JOHN WILLCOCK

About 10,000 accountants are poised to protect themselves from damaging legal actions that have the potential to bankrupt them.

Price Waterhouse and Ernst & Young, which each have nearly 400 partners and about 4,000 other professional staff, are widely expected to announce next week that they have opted to follow the lead of American firms and set themselves up as limited liability partnerships.

This will mean legally registering their operations off-shore. Under British law partners are only allowed to limit their liability if they take no part in running the business.

Accelerating the changes was the High Court decision on Wednesday against Binder Hamlyn, whose 150 partners face ruin from a pounds 105m bill for negligence. The firm is appealing the decision, but the judgment has set the rest of the industry running for cover.

Setting up on the other side of the Atlantic is not considered practical since - in the words of one senior partner - a court is likely to consider an audit firm operating in the UK as subject to UK law. But there is intense speculation that the firms may be planning to register themselves in an offshore financial centre closer to Britain, such as Liechtenstein, the Channel Islands or the Isle of Man.

The expected move follows KPMG's announcement earlier this year that it is incorporating its audit arm in an effort to give itself greater protection from spiralling negligence claims. It means that, with Coopers & Lybrand, the UK's largest firm, also considering some form of incorporation, most of the leading six firms are likely to have ceased to be conventional partnerships by this time next year. As a worldwide organisation, Arthur Andersen is understood to be in a more complex position but considering its options, while Touche Ross has consistently stated its opposition to abandoning partnership status - although insiders suspect it may be looking at protecting itself.

Ian Brindle, senior partner of Price Waterhouse, which with E&Y is facing a $3bn claim over BCCI, recently told an "alumni" dinner of former Price Waterhouse people that the pioneering incorporation plan of KPMG did not go far enough. KPMG is to turn part of its auditing business into a limited- liability company, but this would cover audits only of its biggest clients.

Mr Brindle argued that this did not give a complete answer to the potential threat of bankruptcy facing partners in Big Six accounting firms from the many huge lawsuits on both sides of the Atlantic. He suggested that PW would soon have a more comprehensive scheme.

Observers believe this could cover the whole audit business, the largest part of the firm. Alternatively, it could include the entire firm, embracing tax, consultancy and corporate-finance work. Partners have been unwilling to turn their operations into limited companies because they would lose the tax and other advantages.

The claims have become such a problem that the profession is pressing for reform of the law of joint and several liability, under which an accountant can bear the total loss resulting from a corporate collapse. Because this would take such a long time to achieve, the profession is also campaigning for a halfway house - changing section 310 of the Companies Act 1985, in order to limit auditors' liability.

Outstanding claims

Firm Claim

Price Waterhouse Being sued as auditors of BCCI for $3bn

Ernst & Young Being sued as former auditors of BCCI

Stoy Hayward Being sued as auditors of Polly Peck for pounds 50m

Stoy Hayward Being sued as auditors of Astra

Ernst & Young Being sued by Lloyd's names for pounds 150m

Arthur Andersen Being sued by Lloyd's names

Coopers & Lybrand Being sued as auditors of Maxwell Communications

Coopers & Lybrand Auditors of Barings -

administrators considering action