Binder judgment underlines case for reform

The accountancy profession will hardly welcome it, but yesterday's pounds 65m judgment against Binder Hamlyn is the best piece of evidence it can point to in its campaign for a change in the law relating to auditors' liability. Here is the nightmare scenario that accountants and their insurance brokers have been predicting for much of this decade. Because of a shortfall in the firm's professional indemnity insurance cover - caused by insurers' unwillingness to take on such big risks in the face of mounting litigation - more than 100 partners face having to meet pounds 34m of the claim. The judgment is being appealed, but if a year from now it stands, some prominent accountants might be made personally bankrupt.

Well, almost. This case is complicated by the fact that much of Binder Hamlyn has, since late 1994, been part of the immensely successful US- based Arthur Andersen. Having acquired it because of its UK audit business, Arthur Andersen is unlikely to want to cast the Binder people off. But nor, as rival firms were quick to point out, is it likely to dip into its pocket to bail them out. That would, in the words of one partner at another practice, be a "more than generous gesture". Ultimately, ADT would probably be better off agreeing a deal under which the money is paid off over time, rather than forcing the partners out of homes and callings.

The wider implications are somewhat easier to assess. Irrespective of the final result, the case can only accelerate the rush to incorporate begun earlier this year by KPMG, Britain's largest audit firm. Indeed, the signs are that the coming weeks, if not days, will see many other leading firms delivering their responses to KPMG's attempt to protect itself from huge negligence suits in this way.

There are still doubts over how KPMG's decision to incorporate only its audit arm will work. If Binder had been totally incorporated at the time of the deal that landed it in court, the liability would have been limited to the firm's assets, and the individual partner responsible, rather than scores of others with no connection to the transaction. Even this may be no more than a partial solution, however.

With this case fresh in its mind, the profession will be hoping that the Law Commission, which is studying options for reform of the law of joint and several liability, might provide a more elegant way out of the problem. It has long pressed changes to a principle under which its members can find themselves bearing the whole cost of a corporate disaster.

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