Bravery could reap rewards

THE best argument I have heard for capping the liability of auditors came yesterday from a partner in one of our more dynamic mid-size firms.

'It might make auditors more brave,' he said. 'It might encourage them to be more willing to use their judgment and to take the risks necessary to do the job properly if they were less likely to be sued.'

Unfortunately for the accountancy profession, that is not an easy argument to use because it would imply that much of the current audit work is not worth a lot. This, indeed, is the perception of a large slice of the public and the investment community, but it is not shared by the profession's leaders.

Not while they are still in office at any rate. However, a surprising number of people who spent many years at or near to the top of big professional accountancy firms are sceptical about the value of today's audit.

According to the more erudite of these, auditors have had it too easy for too long. They say the public should have demanded much more than it did in return for giving them the statutory monopoly of public company audit work. Instead, auditors have been able for years to profit from confusion about what they do.

Most auditors admit when they retire that their work almost never uncovered material wrongdoing. They all tell tales about how in the big firms in particular quality was compromised by the desire to sell to clients other more-lucrative services or simply by the pressure on all audit partners each year to deliver a bigger slice of the audit cake.

They say it was only the occasional fear they might be sued for more than the annual fees that ever prompted a firm to resign a difficult client. Thus the gulf between what they think they should deliver and what the public - in this case shareholders - think they should get for their money is huge. It is hardly surprising customers are increasingly keen to sue.

However, there is some substance to the accountants' argument that with only four global firms they are within one mega-action of no longer being able to provide a choice of service to the world's corporations.

That action could come at any time - Equitable Life's claim of more than £1bn against Ernst & Young would, if wholly successful, probably reduce the big four to three, and no doubt the others also have some horrible claims pending too.

But a liability cap would not remove all risk of collapse. Firms also fold for other reasons. Andersen did so because clients deserted it, not because it had to pay damages it could not afford.

Another solution to the lack of competition in audit would be to break up the big four firms, which do not need to be as big as they are. There was never any need for the profession to consolidate as much as it did - other than satisfying the egos of senior partners craving size for its own sake.

The fact is that most of these firms are virtually unmanageable, fail to offer consistent quality globally and pretend to be something - a totally integrated global firm - they patently are not.

Tackling these woes would be much easier if the firms were scaled down. We are used to companies rationalising and delivering more value by getting smaller. It is time accountancy practices gave serious thought to going the same way.

FSA's fine fog

THIS column last week criticised the Financial Services Authority for fining Shell and therefore imposing a penalty on its already hard-hit shareholders for the misbehaviour of its management about which they were ignorant and for which they could not be responsible.

FSA chief executive John Tiner replied in a speech yesterday, saying: 'It is reasonable that where the management of the company fail in their duties that the shareholders suffer to some extent, just like they suffer if the management make bad business decisions.'

He sold the pass a bit, however, by adding that he did not want the fines to be too onerous because shareholders would probably already have been hit by a drop in the value of their investment.

The FSA had three objectives in fining: to let the board know the behaviour was not acceptable; to attract publicity 'and so adversely affect the brand value and reputation of the company in the marketplace' and to act as a deterrent to the market more generally. 'The overriding purpose of our fining policy is to change behaviour,' he said.

I'm afraid I still don't get it. Objectives one and three would be more effectively met by fining the errant directors, not the company. Objective two, hitting the firm's reputation, does more damage to the already sinned-against shareholders. How will that change behaviour?

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