Guilty in the eyes of the public

Accountants feel that they are made the scapegoat for commercial failures. It is unfair and unjustified and, although not the law, regretfully what the public expects. Two suggested cures have been put forward. Both miss the mark. And nobody, particularly amongst the Big Six, is promoting the correct solution for fear of upsetting their clients.

One solution the Big Six have come up with is to move themselves abroad and practise from a base where limited liability is acceptable. Thus they shift their personal assets away from the firing line. However, this is not a particularly attractive proposition and not one that the public is likely to support with enthusiasm. It suggests the maxim – ‘If you cannot beat them, join them’. Ingenious lawyers will probably get over the charade to reach the individuals personally. They will be left just as exposed as before and possibly with a major insurance problem.

The second solution adumbrated is that the law should be changed so that claimants have the responsibility of not only establishing liability and damage, but also of apportioning blame. At the moment, if they get over the three-hurdle test of establishing either a contractual or tortious duty of care; a breach of duty of care; and damages flow as a result, then claimants recover all proven loss.

That is not as easy as it sounds, despite the many claims for damages against professionals and accountants in particular. But once the breach of a duty is established, being the kind of loss contemplated when the duty of care was taken on, it is for the defendants to sort out amongst themselves who pays what proportion of damages awarded, ie who is most to blame. The Big Six want to change that so that the claimant has the problem of establishing who is most to blame as well.

The reason is that very often directors are not insured for enough, are not worth suing or are simply not liable because a crooked director is either in prison or has flown the nest and the other directors are not jointly and severally liable for his misdemeanours. By suing the auditors for not having spotted the problem earlier, the company can recover damages despite the fact that the real culprit has not paid a penny. If the responsibility of apportioning blameworthiness fell upon the claimant, the auditors would have a much less expensive time. Unfortunately that is not politically acceptable.

The answer is to shift the onus away from the checkers to the perpetrators.

As things presently stand, a partner in a large firm of accountants living in the outer Hebrides, conducting a reasonably quiet and successful practice there and carrying out his duties and responsibilities to clients conscientiously, is just as liable to a claimant who has obtained an award of damages of u600m against the firm as the partner in charge of the audit that apparently went wrong. Each partner, and each person held out to be one, whether they be equity partners or not, is liable down to his or her vest and pants for every penny of any judgment unless it is covered by insurance, regardless of the fact that they may have had nothing to do with the audit.

Compare this to a director of a company who is only liable for what is established by the claimant as being the breach of duty of that particular director. The less, therefore, a non-executive director does, the less likely he or she is going to be held liable for what may have gone wrong.

The misdemeanours, negligence and even dishonesty of say a chief executive or finance director will not be visited upon the non-executive directors if they keep their heads above the water, their noses high in the air, ask facile but correct questions and are recorded as having done so; thus keeping themselves free from responsibility when something serious goes wrong because the executive directors have failed in their duties. How different it would be if the non-executives were just as liable for breach of duty as the executives. Then they would take a much more active interest in proceedings and perhaps would not festoon themselves with a myriad of different directorships but concentrate on those few that they know something about.

But why will this help auditors? Because once all the members of the board of a company are jointly and severally liable for the actions of each other in connection with their responsibilities to that company, there will be adequate insurance to meet contribution proceedings brought by auditors. Currently, auditors are seen as the only deep pocket.

Directors may carry insurance but it is of little consequence if the vast majority of the board are acquitted of liability for what one or two did wrong and those that did the wrong have disappeared, gone to prison, been made bankrupt and are uninsured because of an escape clause in the directors’ and officers’ liability policy. The other directors spend most of the indemnity insurance on paying lawyers to defend their own individual position, with a different firm of lawyers acting for each individual director as each one points the finger at the others.

But if the directors have the same liability for an injured party as the auditors then the load would be spread. This, ultimately, will lead to a reduction in the premiums that auditors and, in particular, the Big Six have to pay. It will increase the amount that directors have to pay.

That will be a cost directly on the company concerned and one which should be disclosed to shareholders who will then be able to judge how the insurance market rates their own management. It will put an end to directors washing their hands in public and saying ‘I did not know what was going on, I cannot therefore be to blame’. Instead of huge salaries being paid to one or two of the top executives in the company so that they are prepared for the chop when things go wrong and become sole scapegoats, the whole board will share responsibility and there will be a much more hands-on approach.

But above all, and for the benefit of the accountancy profession and auditors in particular, it will improve corporate governance which is woefully weak. The auditors and accountancy profession are seen as the praetorian guard of the twentieth century. Now, almost uniquely, they control the main public company audits. And today they are in a uniquely powerful position. But they are not exercising their authority to insist that responsibility should fall and be paid for where it lies and the time for this sort of attitude is over. It is up to them to insist that the law is changed.

For now, power lies with the big corporations. Their directors call the shots: we in the professions lie down and obey. But until we make them face the same liability problems as ourselves, corporate governance will always be weak and when something goes wrong it is the professions that continue to pay.

Clive Boxer is senior consultant for Davis Arnold Cooper