Is offshore the place to be?

Accountancy firms are looking far and wide for protection from lawsuits. Roger Trapp reports

T his week, KPMG, Britain's second-largest accountancy firm, has done what would have been unthinkable only a few years ago. It has published full financial results, revealing not just fee income but profits and the earnings of key partners.

Senior partner Colin Sharman and his colleagues have gone to some effort to paint this as a goodwill exercise that goes beyond the legal obligations stemming from its decision to make its audit arm a company within the UK organisation. But it is really a direct result of developments in the battle against negligence suits.

As the UK firm with the largest audit business, it was natural that KPMG should take a lead in finding a way out of the difficulties flowing from the application of the law of joint and several liability. The accountancy profession wants this law reformed because under it auditors - because of the perception that their insurance cover makes them a worthwhile target - can find themselves bearing the whole cost of a corporate collapse even if only partly to blame. But though the US has recently become the latest country to adopt proportional liability and a Law Commission feasibility study on the issue commissioned by the Department of Trade and Industry is shortly to be published, the big firms feel they cannot afford to wait for action. The court judgment late last year against Binder Hamlyn, which - because it had only partial insurance cover - could result in about 100 partners of the firm, now part of Arthur Andersen, being bankrupted, has provided just the evidence they needed that desperate times call for desperate measures.

Days after the judgment, Ernst & Young and Price Waterhouse announced that they were working with the States of Jersey to introduce a law that would allow them to set up in the offshore financial centre as limited liability partnerships. The idea, according to PW senior partner Ian Brindle, is to provide the firm with protection against the type of lawsuit that would wipe it out while not sacrificing the sorts of things that partnerships hold dear - most notably the collegiate structure that remains despite efforts to make the largest firms more businesslike.

Squaring this particular circle will be one of the central themes of a conference on incorporation of professional practices being held at London's Cafe Royal next Thursday by IBC UK Conferences in association with accountants Clark Whitehill and solicitors Allen & Overy.

The fact that Allen & Overy is taking a central role in the debate demonstrates that this issue is rapidly moving beyond the confines of accountancy. Solicitors' firms are increasingly worried about the rising tide of litigation, while the Binder judgment sounded warnings bells for professionals, such as consulting engineers and architects, involved in the traditionally litigious construction industry.

There is little doubt that coming changes in the tax regime make partnerships less attractive business entities than they were. But, as Allen & Overy partner Richard Turner, and David Furst and Chris Greene, of Clark Whitehill, will demonstrate at the conference, there are still many factors to be considered and a lot of complications to be dealt with if the move is to have the desired effect.

In particular, opinion is sharply divided over the effectiveness of KPMG's partial incorporation. Mr Sharman maintains that legal opinion given to the firm states that it can ring-fence its audit business in such a way, but others have their doubts. One prominent partner at another firm believes partial incorporation is just a first step - adopted to ease the financial or administrative burden of changing status - towards total incorporation.

Similarly, not every member of the accountancy profession feels that setting up as a limited liability partnership offshore is the way forward. The plan is inspired by a similar development in the US state of Delaware, where all the leading US firms are now registered. Delaware has long encouraged companies to be based there through having its own approach to certain areas of commercial law while still being part of the US. Jersey does not fall into that category and more than one firm has expressed reservations about "running away" in this way.

Proponents of the Jersey plan say they have been forced into it because UK legislation only allows partners to have limited liability if they take one part in the running of the business.

KPMG claims that leading clients and financial institutions are supportive of its move on the grounds that it will not only assist them in remaining in business but will also, as a result of the required financial disclosure, give them a better idea of its soundness. But the decision earlier this month by the mighty investment bank Goldman Sachs not to abandon its partnership status, when it had been widely expected to, demonstrates that incorporation is still a long way short of being a straightforward issue inside and outside the organisations concerned.

It is perhaps significant of the need to handle it carefully that the lunchtime session at the IBC conference will be taken by Dale Fishburn, chairman of Fishburn Hedges, the PR and design consultancy that has advised Price Waterhouse on matters arising from the firm's involvement in the matter that makes it most interested in audit liability - the collapse of BCCI.

Details of the Incorporation of Professional Practices conference, at which the author will be a speaker, from Sarah Mobsby at IBC UK Conferences, 0171-637 4383.