Not a choice over limited liability
Audit firms have won their battle with the DTI for proportionate liability. But it's not striking a blow for shareholder democracy, says Peter Williams
After years of intensive campaigning and political lobbying by the Big Four (KPMG, Deloitte & Touche, PwC and Ernst & Young), both in Westminster and Brussels, aided and abetted enthusiastically by the Institute of Chartered Accountants in England and Wales (ICAEW), the UK government has finally succumbed.
In the face of scepticism from the City and indifference verging on hostility from the non-Big Four auditors, proportionate liability for auditors will become law.
The implication of the statements from the Department of Trade and Industry (DTI) on the draft package is that after taking the advice of the directors, the shareholders of individual companies would take a vote in a general meeting on whether to allow auditors to limit their liability on a proportionate basis. This seems like a reasonable corporate governance move and a small step towards shareholder democracy.
But the Big Four have other ideas. As soon as the law hits the statute book, the Big Four auditors will send out revised engagement letters with the limited liability as a key part of their terms and conditions. Any company with the temerity to say ‘no’ will be sacked as a client. And, of course, if you are a significant quoted company, you can only source an audit from four suppliers. If all those four suppliers demand the same conditions, then the idea that it is up to the shareholders is a fiction. There is no choice.
This lack of choice is not a result of firms collapsing under the weight of horrific lawsuits. Even the death of Arthur Andersen was the result of a complete loss of reputation, which took place at the hands of the market, not of lawyers and judges. No legislation will protect auditors from that potential fate.
Mergers were driven purely by commercial motives – the partners’ desire to squeeze larger rewards by merging their practices. Following the spate of mergers which culminated in the co-joining of PriceWaterhouse and Coopers & Lybrand in July 1998, the Big Four now have the quoted company audit market at their mercy.
Maybe this increasingly uncompetitive market would be worthwhile if, in return for the concession on proportionate liability and the introduction of limited liability partnerships which received Royal Assent in July 2000, the Big Four were offering something material in return.
The Audit Quality Forum, an organisation of audit professionals, investors, business and regulators, has been trying to “enhance confidence in the independent audit by promoting transparency and accountabilily”. So far, it has even failed to persuade investors that auditing is safe.
In 2002, in the International Journal of Auditing, the respected accounting academic Tom Lee wrote an editorial entitled ‘The Shame of Auditing’.
In his conclusion, he said: “Public accountancy firms, institutions and individuals have to discover and understand fully what it means to be a profession… It is truly about providing service in the public interest before anything else. If a profession cannot fulfil such a mission it should not be recognised as such and there should be less severe hurdles to entry into what is really a trade or craft. If public accountants can successfully accomplish the first step of understanding what a profession is, then there may be hope for their survival as professionals. If they cannot, then the prospect of corporate audit being something more than a government function is doubtful.”
As the Big Four auditors celebrate their forthcoming legislative success, they should ponder whether they really want to be a profession or a government function.