Fear grows among auditors as the liability claims soar: Accountants are seeking government help but sympathy may be short
Sunday 06 March 1994
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'.'
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