Bad press for global partnerships

The personal assets of the partners in Andersen's Irish accounting practice should be protected from possible Enron-related claims because of the limited liability status of its US partner. This protection would not be available if the problems had originated in the Irish practice because auditors here are barred from establishing as limited liability companies.

Of more immediate concern to the Irish partners is the severe damage to the reputation of the global partnership, the likely response of their clients and how the terms of their professional indemnity insurance will change. The damage to Andersen's reputation and the impact of investigations and expected legal actions have already led to speculation about the future of the group.

Andersen, one of the Big Five accounting operations, operates a worldwide practice. This week the practice told The Irish Times the Enron "situation" was a US issue. Explaining that Andersen operated as a global operation for training, information technology and marketing purposes through the Swiss-based Andersen Worldwide, a spokeswoman said the practices in each state were separate legal entities. These individual practices could only become liable if they had carried out work for Enron, she said. In the US, Andersen is a limited liability company. "Any actions in the US will be against the US firm which provided services to Enron," she said. Most or all of the Big Five firms operate "firewalls" based on individual countries or regions for risk management purposes. This means financial liability for negligence or errors can be limited to the partnership in the country or region where the work was carried out.

A complicating factor is that limited liability status is available to auditors in some countries, such as the US and Britain, but not in others such as the Republic. This means that when Irish auditors are sued their personal assets, including their homes, are at risk.

Partnerships buy professional indemnity insurance to protect against this risk. But this insurance carries high excesses - the partners will have to cover a large amount of any claim before the insurance kicks in - and is capped at a maximum payout, which means the partners would have to meet claims exceeding an agreed amount. As a result auditing in the Irish market carries high personal risk for the partners involved.

The multibillion dollar collapse of Enron and the involvement of its auditors Andersen could not have come at a worse time for the global accountancy profession or for Andersen. Reputations had already been tarnished by international scandals. The credibility of auditor independence and their effectiveness as watchdogs was already in question in cases where firms were auditing companies from which their firm was also generating lucrative tax advice and consultancy fees. And the powerful US Securities and Exchange Commission had taken the profession to task on several occasions to get reporting rules tightened up.

In the Irish market, the revelations in the DIRT inquiry and the McCracken tribunal put the profession's self-regulatory status in jeopardy and led to the establishment of an independent board to oversee self-regulation.

Part of the problem is that auditing is the poor relation of the more lucrative accounting services such as corporate finance and tax and can be sometimes sold as a loss leader to open the door to the more lucrative business for the accounting firm.The Enron debacle seemed to confirm everyone's worst fears. While the investigation is still under way, revelations to date have renewed concerns about the independence of auditors and the adequacy of reporting rules.

Accountants in Britain and Ireland maintain companies in these jurisdictions would never have got away with the sort of off-balance sheet reporting that seem to have been common practice at Enron. "The rules are different here. They have been tidied up. Accounting standards here would require an auditor to look through a transaction to establish its substance - including issues of shareholder influence and control - to establish whether it should be consolidated in the company's accounts," according to industry insiders.

"If the risks are staying with the company, the assets and liabilities would have to be included. In the US, under the Federal Accounting Standards Board rules allowed the transaction/vehicle to be off balance sheet as long as Enron did not have more than 3 per cent ownership."

Irish accountants suggest corporate governance rules are now stronger here than in the US. "Directors here have to report on their internal controls, unlike in the US. There are proposals to require directors to report on the independence of their auditors and there is the new company law enforcement office. Many changes they are now looking at in the US are already in place or planned in the Irish market," one senior accountant concluded.