Accountants shiver as cover slips away: A legal onslaught is scaring off insurers. David Hellier and Roger Trapp report

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The Independent Online
THE LEADING underwriter of accountants' professional indemnity insurance in the London market has withdrawn from most of its commitments because it claims the risks have become unacceptably high.

Merrett Syndicate 1067, which used to lead the insurance programmes for four of the big six accountancy firms, has virtually ceased underwriting professional indemnity. It operates from Lloyd's of London.

At the beginning of last month, the syndicate failed to reach agreement with any of the four accountancy firms. 'Our involvement is now incidental,' the syndicate announced, adding that 'any disappointment we may have felt in losing this business is more than tempered by the fact that these firms represented the single most volatile area of our account. There is no virtue in 'prestige' business for its own sake . . .' The decision reflects the growing unease about indemnity insurance for accounting firms, which have become subject to an onslaught of litigation during the recession as companies have collapsed and aggrieved parties have looked for somebody to sue.

Rick Murray, chairman and chief executive of professional services at Minet, the insurance brokers, said in New York last week that: 'The accounting profession today in the major countries of the world is carrying a very unfair and significantly painful burden of paying for the commercial disappointments of the business community. Unless the trends are reversed, which would appear to require some change in the legal and social atmosphere, the point will be reached when the burdens become so extreme that they will not be able to be absorbed.'

Price Waterhouse has already received several writs over its work on the Bank of Credit and Commerce International, the collapsed international bank, and together with Ernst & Young faces claims estimated to be as large as dollars 8bn ( pounds 5.4bn).

Such claims are forcing some insurance syndicates either to pull out or quote premiums so high that they do not write any new business.

In response to soaring insurance costs, Britain's top accountancy firms have this year decided to insure less of the initial risk in negligence cases than before, leaving themselves with a larger potential liability. Many experts say there is a real danger that this will deter people from working in the profession, especially if it signifies the beginning of a trend.

Insurance experts say that in renewing their policies this year, most of the big six firms took at least pounds 15m of extra risk on to their own books. Some firms are having to drop their high-risk clients, claiming this as the only way to ensure survival.

The increasing risk of underwriting accountancy firms stems partly from their changing role. Merrett's own leading underwriter, Richard Hardingham, said: 'Accountants have become more and more intimately involved with their clients' affairs, and when something goes wrong they are a natural target. It's not so much a question of negligence as a question of 'being there'.'

And the problem could get worse, insurers fear. Last week, for example, the Auditing Practices Board proposed new standards for accountants governing when they should report their suspicions about companies in the financial sector direct to the authorities. The increased pressure on accountants to do this comes in the wake of the Bingham report into BCCI. In extreme cases, they are being urged to act as quasi-policemen.

On the income side, however, all the big six firms apart from Arthur Andersen reported a downturn last year due to the continuing effects of recession and pressure on fees, particularly for audit work. Add the worry about litigation if things go wrong and many in the profession worry that without radical change, there will soon be companies that cannot find auditors.

The big firms claim they are often sued because they are known to have insurance cover and therefore 'deep pockets'.

In an effort to halt this trend, they are now campaigning for a reform of the law of joint and several liability, which presently means the accountant can bear the whole loss regardless of the degree of fault.

The practices, which have banded together in both the US and UK to lobby governments, are also seeking a cap on the damages that they can be made to pay. Last August, the big six firms said in a joint statement in the US that the accounting profession as a whole faced about 4,000 lawsuits and dollars 30bn in claims.

The number of claims is believed to have increased marginally during the year and the total value is now estimated to be nearer dollars 40bn. The six estimate that around 11 per cent of their US domestic and accounting revenues is spent on litigation, up from 9 per cent only a year ago.

'Ridiculous numbers are being claimed against some of the large accounting firms,' said David Crowther at Price Waterhouse. 'Unless the trend is stemmed or reversed, we will shortly move to a position where accountants are unwilling or unable to take on audit work through fear of being sued.'

After the US, Australia, Canada and the UK are among countries experiencing high claims activity. Continental Europe has fewer claims but, according to a report to be published next week*, the growth trends in Europe are the steepest in the world.

The lawsuits that loom large

THE FOLLOWING are some of the larger outstanding claims causing nervousness in the international accounting community:

BCCI: Estimated claim of up to dollars 8bn by the liquidator Touche Ross against Price Waterhouse and Ernst & Young.

Barlow Clowes: Touche Ross is being sued by the Department of Trade and Industry.

Standard Chartered Bank: Won a dollars 338m judgment against Price Waterhouse following an acquisition in Arizona. A retrial has been ordered.

Atlantic Computers: Writ served against ex-partners of Spicer & Oppenheim (now part of Touche Ross).

DeLorean: Claim filed in New York for dollars 260m against Arthur Andersen.

Magnet: Claim against Arthur Andersen and Ernst & Young.

Polly Peck: Claim threatened against Stoy Hayward by liquidator Touche Ross.

* 'The Litigation Nightmare - A Threat to Public Accounting Firms', Lafferty Publications.

(Photograph omitted)

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