KPMG plans radical auditing manoeuvre

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The Independent Online

KPMG, Britain's second largest accounting and management consulting firms with total fee income of about £600m, is on the brink of converting its audit practice into a company in an effort to provide better protection against lawsuits.

The firm is potentially more exposed than other leading competitors to the increasing tendency to sue auditors in the wake of company collapses. Audit forms a larger proportion of its business, and it currently audits about 20 per cent of all listed companies. But Colin Sharman, senior partner, believes other firms are likely to follow suit.

Ian Brindle, senior partner of Price Waterhouse, is on record as saying that incorporation is a matter of when, not if, and the firm says it is "certainly considering very seriously". The position is similar at Coopers & Lybrand, the biggest firm, where a spokesman said: "We've got a working party looking at the options, but we're not as far progressed as KPMG."

Touche Ross is the only Big Six firm to actively come out against the idea. John Rocques, senior partner, has repeatedly stated that it regards partnership as a way of doing business that has served it well for nearly 100 years. "Our level of enthusiasm for incorporation is therefore really quite low," he says.

However, other firms suggest that Touche's willingness to negotiate caps on liability in areas where, unlike audit, it is allowed to indicate it may shift from this stance in the future.

Moreover, it is believed that the business world is increasingly accepting that this is the only option for audit firms in the absence of reform of the law of joint and several liability, under which auditors - and their partners in other parts of the firm - may bear the whole loss even if they were only partly to blame.

The 600 UK partners at KPMG are due to vote on the issue at the end of the month. If, as is expected, the move is approved, the audit arm which accounts for nearly half of the organisation's revenue should be incorporated by the end of the year.

Since incorporation would require the firm to disclose much more financial information than before, this is likely to lead to KPMG breaking ranks with its rivals and providing indications of profits across the whole practice. A spokesman said that, because audit amounted to such a large part of the business, it made sense to give the figures for the whole business rather than restrict them to the incorporated part.

Pointing out that the detail would not be worked out until after the vote, he indicated that the partners had accepted the principle of the idea of making public more than just gross income figures, which have recently been subject to analysis as a result of growing interest in the affairs of partnerships.

The development follows months of consultations with clients, regulatory authorities as well as other interested groups in the City and industry. There has also been extensive work inside the firm to settle the detail ahead of the vote, although Mr Sharman denied that the discovery of a substantial tax problem had caused a delay. "It is all settled except for one issue, and that is not significant. You just have to settle it before going to the partners," he said.