Fix auditor’s liability and rotation rules – UK competitiveness report

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.”

Arvind Hickman

UK Profession: Vital statistics

• 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