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Fix auditor's liability and rotation rules - UK competitiveness report

The UK accountancy profession needs to address auditor’s liability, partner rotation rules and continue to seek talent from abroad if it is to remain at the forefront of the global industry, according to a new report on the professional services sector.

Although issuing a clean bill of health, the Professional Services Global Competitiveness Group (PSGCG) report said the UK profession cannot be complacent if it is to remain an international best practice leader in 10-15 years.

The PSGCG is a group of industry leaders that were formed to advise government on medium- to longer-term trends impacting on the competitiveness of the professional services sector in the UK.

Kingston Smith senior partner Michael Snyder is a co-chair of the group. Other notable group members include KPMG UK chairman and senior partner John Griffith-Jones, Baker Tilly national managing partner Laurence Longe, PricewaterhouseCoopers UK senior partner Ian Powell and former Grant Thornton UK managing partner Michael Cleary.

Snyder told the International Accounting Bulletin the report was largely positive although a few common trends need to be addressed in taxation, regulation, liability reform, flexibility and innovation.

Key recommendations include seeking new markets for recruitment and services. Snyder said it will be important to recruit from a global talent pool and also adopt a broader age band of trainees because the number of 18-21 year olds is predicted to decline by 12 percent in 2015. Ensuring London and the UK is an attractive market with the right infrastructure for talent and clients is another key recommendation.

The report has urged the government to discuss new solutions to reform auditor’s liability in light of the fact the recently introduced limited-liability agreements (LLAs) provision has proven ineffective.

“It was not the government’s intention that [LLAs] were going to be a panacea,” Snyder said. “Clearly, there’s not one single public company, as far as any of us know, that has actually signed up for one of those things. Equally, the big lawyers are all saying that they could not possibly recommend it to an audit committee because there wouldn’t be any direct benefit to that company.”

In February, the US Securities and Exchange Commission ruled that LLAs would not be acceptable to US regulators, placing greater pressure on legislators to find a new solution.

Germany and Australia are countries where liability limitation exists and Snyder said the UK profession runs the risk of becoming less competitive if reform does not occur.

“What we do have is that people always expect, because they know we have a professional indemnity policy, that they will always have a pop at us even if other people are really to blame,” he added.

“While we can well defend ourselves, firms and our insurers rake up legal fees. That is a real concern.

“Another thing about limiting liability is that it makes people very cautious in the provision of advice. If we want really proactive advice, then we need to allow innovation. You need to have that security to know that when you are doing it you are not just going to be sued with unlimited liability.”

Another concern for the UK profession is audit partner rotation rules that force companies to change their auditor every five years. A lot of other countries have seven-year rotation rules.

“Clients like you to be there for a long time because they like you to understand their affairs and deal with the same person,” Snyder said. “I think we are in danger of denigrating the word ‘professional’ when we keep having to regulate people as if they can be assumed to not be honourable, have independence of mind and integrity. Therefore, you are regulating to the lowest common denominator.”

• 25 percent of FTSE 100 chief executives are accountants

• 6 major professional bodies have consistently grown from 2002-2007

• Accounting sector contributes 1 per cent of UK GDP, 1 percent of employment and just under 1 percent of gross services exports

• 8 percent of all graduate jobs are in accountancy

• In 2007, the accountancy profession employed 245,000 people in the UK

• The total revenue of the top 50 accounting firms is £8.8 billion. Only the US top 50 generates more revenue.

Source: PSGCG report

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