Big Six seek #25m due diligence cap

The Big Six accountancy firms last week filed a set of standard contract terms with the Office of Fair Trading and the European Commission that will cap liability for due diligence work to the value of a deal or #25m, whichever is lower. The terms also provide that, if a deal goes wrong, a judge will be asked to apportion liability.

But the new terms will only be used in due diligence contracts with venture capital houses. The firms have been trying to introduce liability caps into such contracts for more than a year, but with ‘limited success’, according to Geoff Westmore, head of corporate finance at Coopers & Lybrand – hence the need for such a collective effort.

But Westmore added: ‘The venture capitalists kept saying to us, “We can live with this, but we don’t want to be in the position of having to choose an accountancy firm on the basis of the differences in their limitation caps”.’ One executive at a leading venture capital house said that the agreement was little more than the ‘formalisation of existing practices’, while Alan Comber of KPMG, who was the ‘unofficial chairman’ of the Big Six working group, said that venture capital firms had given ‘constructive’ input into the negotiations.

But merchant bankers have strenuously resisted any attempts to introduce such clauses where firms act as reporting accountants on flotations, for example. Anthony Beevor of Hambros Bank, chairman of the London Investment Bankers Association, criticised the accountants’ move. ‘The fixed ceilings and the non-negotiable nature of this new agreement really ought to attract the critical attention of the competition authorities,’ he said.

Accountancy firms have agreed not to introduce such terms in their contracts with merchant banks until a way can be found to prevent the liability risk passing back to the bankers. One merchant banker explained that the liabilities in such work were open-ended, whereas venture capitalists are simply trying to protect their own investment.

He added that the agreement was part of a larger game plan: while accountants are lobbying for a change to the liability laws for their audit work, he believed that the DTI wanted to see how successful the firms could be at introducing a contractual, market-based solution before giving its backing to new legislation.

Comber said that the document will be sent to the English ICA, and may be circulated to other accountancy firms. ‘We’re not trying to keep it to ourselves,’ he said.

David Spence in Grant Thornton’s investigations unit said his firm had had some success at introducing capping clauses when necessary, but that he was particularly looking forward to seeing the proportionality part of the new agreement: ‘It coincides well with the principle that we are all trying to get adopted on a wider base.’