As the Big Four reveal plans to integrate or more closely align
member firms, insurance and litigation experts warn that presenting
networks of firms as a single entity in pursuit of commercial
benefits also carries with it enhanced litigation risk.

This year, Ernst & Young announced plans to integrate 87
firms in Europe, the Middle East, India and Africa into a single
business unit. KPMG Europe is now comprised of UK, German, Swiss
and Spanish firms. Recently, PricewaterhouseCoopers re-structured
its network, aligning firms into regional clusters. Deloitte, too,
has clusters in Latin America, Southeast Asia and the
Caribbean.

Though the nature and level of integration within these networks
varies, clarity is needed on the true relationship between member
firms, according to Jane Howard, a partner at London law firm
Reynolds Porter Chamberlain.

“If people are branding themselves under a common name and
offering a global service, they need to ensure that adequate global
standards and quality control regimes are in place to effectively
manage the risks,”
she said.

“Common quality control can, however, be double edged. It will
be used by plaintiff lawyers, as in Parmalat and other cases, to
argue that one firm should be responsible for the acts and defaults
of another firm even in circumstances where, in reality, the
quality control is fairly superficial and the firms are in fact
independent.”

Howard, whose firm has been involved in a number of high profile
liability cases, warns the more integrated a network becomes the
greater the threat of vicarious liability claims.

Anthony Calder-Smith, a UK executive director of insurance
company Aon, said the recent integration moves by the Big Four will
heighten the risk of vicarious liability.

“The firms, I am fairly sure, will maintain individuality to the
extent they are able to and, from a legal perspective, entities
will remain local.

“But I think any move towards centralisation of risk controls,
systems and finances of any sorts will bring with it a risk of
vicarious liability,” he said.

Managing the threat

E&Y said the integration of its firms into regional units
will allow it to better manage risk, off-setting the threat of
vicarious liability. This is a point that Calder-Smith agrees.

“I think the market will see that there is a bit of a downside
to this in return for an awful lot of good upside, which is an
improvement in the risk management systems,” he said.

The threat of vicarious liability is polarising the profession
between those global entities that wish to be known as networks or
even partnerships and those that wish to be defined as associations
or alliances of independent firms.

Smaller associations are becoming risk adverse and dismantling
key network characteristics in order to help reduce not only the
threat of liabilities passing but also the regulatory burdens
inherent in ‘network’ status. For example, some associations have
asked member firms to remove common branding and are outsourcing
quality control measures to regulators and independent third
parties.

“They are trying to avoid enhanced liability because they
recognise that they haven’t got the resources or aren’t
sufficiently integrated to be able to deliver the quality control
that global branding might suggest at this point in time,” Howard
said.

Clarity is key

Firms that belong to mid-tier networks are sometimes stuck in
the middle, trying to market themselves as members of bona
fide
networks while remaining independent.

Howard said it is important these firms make it clear they are
truly independent and incorporate this message into contractual
arrangements with clients. ‘Sole recourse’ clauses are becoming
more common and a legal safeguard.

“These require the client to agree that in the event of the
claim it will only sue the local firm and that it recognises that
other network firms and umbrella organisation aren’t responsible,”
Howard said. “Whilst these clauses haven’t been tested in court,
such contractual protections give some comfort.”

There is little doubt the integration/re-structure trend is here
to stay. Major networks believe it makes a lot of commercial sense
to more closely align the operations of firms and leverage the
power of a global brand. Equally, wily claimant lawyers are waiting
in the wings. As firms come closer together, opportunities will
develop for lawyers to link the pockets of wealthier partners to
the hands of smaller ones. The key will be the ability of networks
to manage the liability risk.

What lawyers look for

Jane Howard, a defence lawyer who regularly advises ‘networks’
and international associations on liability issues, reveals a list
of factors that plaintiff lawyers seek to demonstrate that
‘umbrella’ organisations and other member firms should share
responsibility for the actions of a culpable local member firm.

• Overlapping executives at senior level between local firm and
umbrella organisation;

• Sharing of common office space between local firms and
umbrella organisation;

• Regular cross-checking of one another’s work/common system of
quality
control;

• Sharing common audit methodologies and manuals;

• Sharing of a common name or logo, particularly when an audit
report is signed off in the name of the global umbrella
organisation;

• Network wide marketing as a single entity;

• Reporting member firms’ revenues on a combined basis;

• Allegations of profit sharing between members (perhaps arising
from referral fee arrangements).

Source: Jane Howard, Reynolds Porter Chamberlain

Integration does not equal higher cost

Closer integration within accountancy networks is likely to
increase the risk of vicarious liability but it should have minimal
affect on insurance.

Aon UK executive director Anthony Calder-Smith said the cost or
availability of insurance is not closely linked to quality and risk
management, or to the potential liability due to integration.

“Unless there are truly dramatic changes to the risk profile of
a firm it is a consideration as to whether you would want to insure
a firm or not but it is not really a consideration in the actual
value of the insurance policy, the cost of the insurance,” he
said.

“The cost of insurance is really to do with the willingness of
markets to write this business because it is a complex and high
risk business in the first place. It is to do with evidence of
profitability at current rated premiums, which is really the last
ten or 15 years of losses. So, this will only have an impact on
price if in five or six years’ time we can find evidence that
[integration] had an impact on losses.”