If we cap auditors' liability, why not food producers' too?
By
Prem Sikka
MAJOR accountancy firms have done very well out of this Labour Government. Legal action initiated by the previous Government against Andersen over its involvement in the DeLorean scandal was dropped. The firm became a key player in devising Labour’s tax and public sector policies.
Labour could not find legislative time to reverse the notorious 1990 Caparo judgement, which limited the people to whom the auditors owe a duty of care, or to honour its 1997 manifesto commitment to introduce independent regulation of accountancy firms. Nevertheless, it rushed through the Limited Liability Partnership (LLP) legislation to protect accountancy firm barons from the consequences of their own failures. This supplemented the Companies Act 1989, which enabled accountancy firms to trade as limited liability companies.
Labour could not find the resources to launch an independent investigation into alleged audit failures at the Bank of Credit and Commerce International (BCCI), the Accident Group, Polly Peck or Resort Hotels. However, it opened up huge money-spinning opportunities for accountancy firms in public sector consultancies, performance reports, Private Finance Initiatives (PFI) and Public Private Partnership (PPP) contracts.
Unlike the US and the EU, new Labour is now considering capping auditor liability, regardless of the level of auditor negligence, to limit further the public’s redress against negligent auditors. This is even though the 1997 House of Lords judgment in Banque Bruxelles Lambert v Eagle Star Insurance has already enshrined a system of “contributory negligence” so that the parties causing the loss can be forced to pay up. An earlier investigation by the Law Commission, carried out at the behest of the auditing industry, rejected capping and full proportional liability as being against the public interest.
Without any reflection on the organisational practices that give rise to audit failures, accountancy firms and trade associations are relentlessly pursuing more liability concessions. No one ever forced an accountancy firm to accept a client or issue an audit report. They accepted Maxwell and BCCI as clients and collected millions in auditing and consultancy fees. But when the chickens come home to roost, they want the State to shield them and the public to bear the cost of their shortcomings.
On the back of “joint and several liability”, accountancy firms have become global organisations. There is little evidence of any liability crisis other than what the firms have unleashed upon themselves through failures at Enron, WorldCom, Xerox, Atlantic Computers, Maxwell and BCCI, to name a few.
Some of the biggest lawsuits are actioned by one accountancy firm, as receiver or liquidator, against another. This is profitable business as it increases the fees of the suing firms. Ordinary shareholders get precious little from such lawsuits.
In 1994, data published by the ig Eight firms then showed that their liability costs amounted to just 2.67 per cent of their total income — considerably less than other businesses. And ordinary people spend a far higher proportion than that on car and building insurance to safeguard third parties, yet this has not prompted the Government to “cap” citizens’ liability.
Rather than indulging accountancy firms with liability concessions, other countries are taking tougher regulatory action and forcing the firms to reflect on the consequences of their actions. In America, Andersen destroyed key documents and was convicted of criminal conduct over the fraud at Enron. An Arkansas judge fined PricewaterhouseCoopers $50,000 (£29,000) for destroying documents related to a lawsuit in which the firm is accused of fraudulently overbilling clients.
A former Ernst & Young partner, who allegedly altered and destroyed working papers relating to the audit of NextCard, has been arrested in the US. A fifth KPMG partner has been charged by the US Government over the debacle at Xerox. Deloittes is entangled in the worst US insurance failure, Reliance Insurance. All the major accountancy firms are being pursued by federal and state authorities for developing questionable tax shelters that enabled clients to wipe billions off their tax liabilities.
In the UK, in sharp contrast, feather-duster regulation remains the order of the day. Instead of effective regulatory action, the Government is likely to offer liability concessions to accountancy firms and introduce the biggest anti-consumer legislation of all time. With an artificial liability cap, shareholders will be prevented from pursuing negligent auditors. Liability concessions will further erode incentives for accountancy firms to deliver high quality services. Anything given to auditing firms cannot easily be denied to producers of cars, cigarettes, medicine, food, drinks, chemicals, financial products and others. Consumer protection will be seriously eroded.
Is the Government about to open a new chapter in its industrial policy, where the public might receive poor goods or services but the producers will be shielded by an artificial “cap” on their liabilities?
The author is Professor of Accounting at the University of Essex