Fear grows among auditors as the liability claims soar: Accountants are seeking government help but sympathy may be short

TO THE public, accountants are grey characters who keep a cold eye on the figures. But lately they have been letting their feelings show.

In last week's Institute of Chartered Accountants debate on a paper to be sent to the Government, partners in firms normally noted more for their technical nous than their ability to touch the emotions, painted bleak pictures of a world where thousands of accountants and support staff might lose their jobs at one fell swoop - 'some never to work again' - and of widows and orphans unable to collect on deceased accountants' estates because of fears of future lawsuits.

The reason for their anguish is the crisis in audit liability. Over the past decade both the number and value of claims have escalated, to reach the point where Minet, the leading insurance broker in the professional liability field, claims there is a real risk of one of the UK's leading firms collapsing.

A report compiled from the broker's records, recently published as part of a submission to the Department of Trade and Industry calling for reform of the law, claims that the six largest firms told their insurers about just three claims in 1982- 83. By last year that figure had grown to 210, with more than 600 remaining open.

Over the same period the average value of the three largest suits - excluding the potential dollars 8bn ( pounds 5.3bn) writs faced by Price Waterhouse and Ernst & Young over the failure of Bank of Credit and Commerce International - increased 12.5 times. It is estimated that last year the eight largest firms in the UK spent 8 per cent of their combined audit fee income of pounds 932m on costs associated with legal claims. Not surprisingly, premiums have also soared (rising 37.5 times, according to Minet), with the result that many firms are unable to obtain cover at any price and are thus in effect self-insuring. Last year, Merrett Syndicate 1067, the leading underwriter in the London professional indemnity market, withdrew from most of its commitments on the grounds that the risks had become unacceptably high.

This move and others like it are cited by the auditors as evidence that the free market - so dear to most accountants - has broken down and must be corrected through government intervention. While claiming that they do not object to paying out if found to be at fault, they say they are often unfairly sued because they are perceived to have 'deep pockets' by virtue of carrying 'mythical' heavy insurance cover. Furthermore, the legal principle of joint and several liability means that they can be forced to meet a total loss resulting from a company failure even if they are found to carry only a tiny proportion of the blame.

Technically, partners are held to be liable for any claims that arise out of work done while they were part of the partnership, even if they have since left. In practice, however, those leaving are given an indemnity by their former partners which protects them from any future claims that might be made.

On the other hand, if a huge claim like that expected to result from the BCCI collapse is successfully pursued to the end, rather than dropped, that could change. According to Andy Pollock, who a few years ago set up the small firm Rees Pollock with fellow ex-partners from Ernst & Young, he and his colleagues could be liable if all the members of their former firm are wiped out without meeting the amount of the claim.

The leading firms claim that fears like this are becoming so widespread that many talented accountants are deciding not to become partners. They also suggest the quality of auditing is threatened if the same nightmare prompts top graduates to seek alternative careers.

As a result, they are echoing similar attempts in the United States and elsewhere, and - with the Institute, which through also representing accountants in small firms and in industry is seeking to provide a broader perspective - lobbying separately for a reform of this law on the grounds that it is unfair. But since both groups recognise that such a change is unlikely to reach the statute book within a decade, they are pressing for a change to section 310 of the 1985 Companies Act, which at present makes auditors the only providers of professional services unable to limit their liability through agreement with their clients.

Brandon Gough, outgoing chairman (senior partner) of Coopers & Lybrand, the UK's biggest firm, believes this will create 'a more sensible balance' between risk and reward for auditors, while retaining substantial protection for companies and their shareholders.

However, some of his colleagues feel it flies in the face of current thinking on corporate governance, which holds that auditors are in fact answerable to shareholders rather than directors and should therefore be seen to be independent of them. Chris Swinson, the former senior partner of Binder Hamlyn who is now at Stoy Hayward, said at last week's debate that the interests of the profession could be damaged if auditors were seen to be acting as insiders in this way. Others suggested that it might encourage dishonest managers to seek such deals with the deliberate aim of obtaining weak audits.

On the other hand, Ian Hay Davison, chairman of the company that publishes this newspaper and a member of the Institute council, favours tackling section 310 'because it is unique' and leaving joint and several liability alone - at least for now. This is because it is extremely useful to 'jobbing chairmen' such as himself who are using every means possible to recover funds on behalf of shareholders. They simply decide who has the greatest insurance cover and go after them. If nobody is adequately insured they do not bother.

The paper prepared by a committee that was chaired by the Price Waterhouse partner Graham Ward and included Mr Hay Davison was eventually accepted by the institute council, and will now join the previous week's submission from the large firms at the DTI. But the range of opinions expressed, even within a body that accepts there is a problem that needs to be dealt with, is perhaps indicative of the proposal's chances of gaining wider support.

Prem Sikka, the East London University academic who advises Labour MP Austin Mitchell and is himself a fierce critic of auditors' performance in recent years, said such a move would reverse the trend of consumer protection legislation. Citing the absence of class actions and protection from all but the narrowest claims, he said: 'Things are already too much in favour of auditors.'

Mr Pollock pointed out that the public interest argument was 'a difficult case to sell' since accountants were perceived to be crying for help because their fortunes had suffered. 'I think that something needs to be done,' he said. 'But it needs the collapse of a Big Six firm to make it happen. People are saying 'they don't look poor to me'.'

(Photograph omitted)

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
peopleMathematician John Nash inspired the film Beautiful Mind
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Life and Style
Audrey Hepburn with Hubert De Givenchy, whose well-cut black tuxedo is a 'timeless look'
fashionIt may be a paradox, but the industry loves it
Arts and Entertainment
The pair in their heyday in 1967
music
Life and Style
fashionFrom bathing dresses in the twenties to modern bikinis
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

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine