View from City Road: Accountants face the real world

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When the law and ethical guidelines were changed a couple of years ago to make switching from partnership to company status a realistic option, most accounting firms dismissed the idea out of hand. The existing system - albeit designed for much smaller entities than the likes of KPMG Peat Marwick - worked well and did not need altering, they said.

It has taken a wall of litigation - which threatens to impoverish a whole generation of middle-class professional Britain in the same way as Lloyd's - to change their minds. Having failed to excite the public or the politicians about their plight, firms like KPMG are now taking the first steps towards incorporation.

In the US total claims are now estimated to be running at dollars 40bn. Although few of these cases will reach court, the cost of dealing with them is put at about 10 per cent of total accounting revenues. In Britain, too, the situation is becoming acute. Professional indemnity insurance at a realistic price is becoming all but impossible to obtain.

Litigation is not the only factor driving the move towards incorporation, however. Changes to the tax system which reduce the advantages of partnerships are playing a part, too, as are the imperatives of the modern business world. To this day, many accountants and lawyers refuse to think of their firms as businesses. Insisting they are 'professionals', many live in a world that resembles a university senior common room or gentlemen's club.

Most partnerships - accountants and lawyers alike - have paid lip service to modern business practices by setting up management committees and calling their senior partners chairmen. Yet whenever they have something important to decide they have to consult each and every partner, irrespective of their role and value within the firm. In an organisation like KPMG, which last year billed nearly pounds 500m, that means consulting 594 people.

The irony is that partners who vote for incorporation to protect themselves from litigation will lay themselves open to another threat - the real world. It is not hard to see the potential for streamlining and cost-cutting in a firm like KPMG, particularly at a time when fee income is static.