Financial Times: KPMG chairman lobbies for limits to liability in lawsuits: “following a wave of business scandals": “Mr Rake declines to comment on KPMG's audit of Hollinger International, the US publishing company allegedly looted by Conrad Black, its former chairman. But he defends KPMG's audit of Royal Dutch/Shell, the energy company found overstating its oil and gas reserves.”: “…insists auditors cannot "take responsibility for everything". (ShellNews.net)

By Andrew Parker

Published: September 13 2004

Given the damage to the accounting profession's reputation following a wave of business scandals, it helps that its leaders are stubborn optimists.

Mike Rake, international chairman of KPMG, is hoping that the accounting firms will persuade governments to embark on reform that will limit their liability in lawsuits alleging negligent audit work.

The big four firms - Deloitte, Ernst & Young, KPMG and PwC - worry that one or more of them could be destroyed by massive claims for damages.

The UK government last week rejected a cap on auditors' liability. But Patricia Hewitt, UK industry secretary, said she would consider the case for a legal regime under which auditors would pay damages according to their degree of culpability in a financial reporting failure compared with directors.

The proportionate regime would, for example, stop auditors having to pay for the mistakes of directors who were bankrupt.

"I really do believe the statement by Patricia Hewitt was positive in the sense it recognised there is a real issue here," says Mr Rake, who argues that UK reform could have a significant influence on other countries.

The firms are lobbying for liability reform partly because they fear that their traditional defences against lawsuits could soon be breached.

Although the firms present themselves as unified businesses, they are in reality federations of partnerships spread across scores of countries.

The firms have long insisted that only the member partnership that certifies a multinational company's group accounts as accurate could be sued for damages. The partnership will typically be located in the country where the multinational has its headquarters. The firms have strongly rejected attempts to pin liability on member partnerships that assist the group audit by looking at subsidiaries outside the multinational's home country.

However, their stance is coming under assault from lawyers acting for aggrieved companies and investors, particularly in the US.

Enrico Bondi, administrator at Parmalat, the Italian dairy company beset by an alleged accounting fraud, last month filed a $10bn claim in Chicago seeking damages from Deloitte's US partnership as well as the Italian partnership that certified the group accounts.

If Mr Bondi or anyone else persuades the courts to pin responsibility for audit failure on more than one member partnership, the firms could lose one major incentive for retaining their existing structures.

Mr Rake prefers to focus on liability reform and changes to the regulation of accounting firms as precursors to the creation of single global partnerships.

Many governments have traditionally required that auditors in their countries demonstrate their independence by showing they cannot be influenced by outside interests.

The firms' global leaders often cannot issue orders to member partnerships because of national rules on auditors' independence.

However, Mr Rake predicts the rules could be relaxed in the future because of regulators' complaints about variations in the quality of audit work done by the firms' member partnerships.

Mr Rake says issues surrounding the taxation of firms' partners would also have to be resolved ahead of any move to a single global partnership.

Partners pay tax on the profits generated by the partnership they belong to. If a global partnership were formed, they would share in one profits pool.

Mr Rake stresses KPMG has no current plans to transform itself into a single global partnership. But he says: "If there was reform of liability, change in the regulatory environment and the fiscal environment, one could see a day when it might be possible to have a genuinely one-partnership approach." He suggests a timescale of 10 years.

In the meantime, KPMG, like its rivals, is focused on improving audit quality and ensuring consistency of work across its 93 membership partnerships.

The Public Company Accounting Oversight Board, the US accounting regulator, last month highlighted how KPMG's US partnership did not make clear that audit quality was the most important factor in auditors' remuneration.

Mr Rake says KPMG auditors are rewarded for the quality of their audit work and not for helping the firm secure lucrative advisory assignments with clients.

"Our overall objective is to provide audit, tax and advisory services to the highest level of integrity, quality and consistency that we can," he says.

Mr Rake declines to comment on KPMG's audit of Hollinger International, the US publishing company allegedly looted by Conrad Black, its former chairman.

But he defends KPMG's audit of Royal Dutch/Shell, the energy company found overstating its oil and gas reserves.

Auditors are not obliged to check the accuracy of reserves reporting, and Mr Rake rejects suggestions that it should form part of their responsibilities in the future.

He says the work could be done by independent engineers, and insists auditors cannot "take responsibility for everything".