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Unlimited liability a major concern for the sustainability of auditing function according to industry chiefs Back  
Exposure to unlimited liability in auditing and the ongoing troubles with recruiting suitable employees are the main concerns for managing partners according to this year’s survey. In particular, unlimited liability in auditing may lead to it becoming an unsustainable area of business for some firms.
Auditing is once again one of the accounting industry’s main concerns. Many managing partners feel that the current system of unlimited liability in the partnership model, is threatening the sector to such an extent where the viability of auditing is coming into question, especially in today’s increasingly litigious environment.

This has been taken to the point where the benefit of auditing a small or medium enterprise is no longer obvious for an accounting firm. ‘The risk compared to the reward is no longer in line, particularly on SME type audits,’ says Pearse Farrell, managing partner of Farrell Grant Sparks.
This concern can be seen at all levels of the industry, and the Big 4 are no exception. All of the Big 4’s managing partners agree that there is currently an imbalance in partner liability. Ronan Murphy, managing partner of PricewaterhouseCoopers, believes that unlimited liability goes as far as to threaten the sustainability of auditing. ‘Unlimited liability status, together with its associated cost, represents a genuine threat to long term sustainability of the auditing profession,’ he comments.

To move on from this situation, the old system needs to be revamped, according to Terence O’Rourke, managing partner with KPMG, ‘In relation to professional services firms the creation of limited liability partnerships (LLPs) would bring us to a level playing field with firms in nearby jurisdictions like Northern Ireland and Great Britain. Limited liability partnerships allocate liability more fairly to reflect modern business norms.’

Managing partner with Ernst & Young, Paul Smith feels that the introduction of limited liability in the profession is long overdue. ‘This reform has happened in other jurisdictions and is long overdue in ours.’

There is a widespread consensus among managing partners that limited liability would bring the auditing function in line with other competitor countries as well as with other industries that currently enjoy the limited liability not available to accountants. For such reform to take place, it would require a reform of the Partnership Act, 1890.

Among some managing partners, the Act has no bearing on the industry today. ‘[The Act is] outdated and no longer relevant structure for a modern firm,’ according to Patrick Gillen, managing partner with Russell Brennan Keane.

John Glennon, managing partner of the newly formed Baker Tilly Ryan Glennon, feels that the threat of unlimited liability is one factor behind the industry’s other main problem, recruitment. He says that obtaining limited liability was essential ‘to enable the profession to continue to attract the best talent, in competition with other industries where personal liability is limited, whilst operating in an increasingly litigious environment.’

Partnership model
With a considerable amount of negative sentiment towards the Partnership Act, 1890, FINANCE asked the managing partners whether they felt that the partnership model itself was outdated, and if firms would prefer to see a move towards a more corporate model in business management. Some firms feel that the partnership model has been well adapted to meet modern needs through bonuses, while others feel that a more formal corporate management approach is best suited to running a larger company.

Pearse Farrell agrees with the latter. ‘As the number of partners in a partnership increases and goes into double figures, management effectiveness and efficiency is best achieved with a corporate rather than a partnership model. While share options in a corporate model are an excellent alternative means of remunerating management and staff.’

One of the main problems with the partnership model is how to best organise management in the system. ‘Committee approval to managing business does not work for larger entities,’ observes Partick Gillen.

‘The pace of change in the profession has been significant in recent times. From our perspective for a mid-tier firm to survive it must have clear strategic direction and a strong management team. These attributes require firms to structure and function along more corporate lines,’ adds John Glennon.

However, Patrick Lawlor, managing partner of Brenson Lawlor, feels that this can be put in place within the partnership model. ‘As the business expands there are more formal structures put in place to manage the business.’

This feeling is not unanimous among managing partners, and Terence O’Rourke feels that it is much more of a nuanced issue. ‘It is not a simple yes or no answer. The partnership ethos is fundamental to KPMG as an organisation and the way it governs its business. I do not see that changing. That said, as the firm scales we have adapted a more corporate style in how we organise and manage on a day to day basis,’ he says.

For Deloitte, the partnership model continues to prove effective, says Paul Cullen, ‘The partnership model has served the business very well and has allowed us to focus on building long-term growth without an undue focus on short-term profit. The concept of shared ownership builds a spirit of commitment and puts an extra value on providing a quality service to clients.’

Paul Smith believes that the partnership is still a good model for firms to work from, while he does acknowledge that change is needed. ‘The partnership model has many virtues that work to the benefit of firms. Certainly, factors such as open liability and restrictions on partnership numbers are issues we have to deal with, but at its core the partnership model promotes a true sense of membership and collegiality that prevails even as firms grow large.’

Outside concerns about the unlimited nature of liability in auditing, the other major problem in the industry is the same as has been seen in previous years, staffing. However, despite these ongoing worries, this year’s Accountancy Survey found that the top 20 firms hired over 2,000 staff in the year June 2006-June 2007, and intend to hire a further 2,260 staff in the 12 months from June 2007- June 2008.

One possible reason for growing optimism in respect of recruitment is the announcement of the Green Card Scheme. Unveiled by Minister for Trade, Enterprise and Employment, Micheal Martin on January 24th, 2007, The Green Card Permit Scheme was passed following consultation with the financial services industry, where the skills shortage remains problematic.

The new Green Card Permit Scheme allows a foreign national to be employed by a named employer in a specified occupation. The new arrangements will also allow employees to apply for immediate family reunification and will permit applications for permanent residency after two years. The usual ‘market needs’ test will not be applied.

Where the annual salary (excluding bonuses) is €60,000 or more, the green card is available for all occupations. Where the annual salary ranges from €30,000 - €59,999 a green card is available for a restricted number of important occupations. There are a number of accounting occupations that fall into this second category, including fund accountants and chartered and certified accountants.

Paul Cullen, managing partner with Deloitte, feels that the Scheme will help to widen the net during the recruitment process.’[The scheme] will make some contribution as it facilitates the process of recruiting staff from outside the EU,’ he says.

‘The government has introduced a very sensible scheme especially for highly paid, highly talented internationally mobile specialists. Recruiting the required number of qualified professionals continues to challenge the industry,’ says Terence O’Rourke.

However, some people believe that the Green Card hires will still require training to operate in this jurisdiction.’It may well alleviate critical skills shortages, but country specific skill-sets will still be required,’ notes John Glennon.

For others, the jury is still out as to whether the Scheme will have any tangible impact on the skills shortage. ‘We welcome the Green Card initiative. However, at this early in the process it is not possible to determine the extent to which it will have a positive impact in addressing the recruitment challenge,’ says Ronan Murphy.

This year saw the initial steps taken by the Irish Auditing and Accounting Supervisory Authority (IAASA), after its had been established following the Companies (Auditing and Accounting) Act, 2003. Most members welcome the IAASA and applaud it for its efforts made in its first year, while others will hold judgement until its work can be better assessed.

Ronan Murphy is among those to laud the Authority’s activities and presence in the accounting world. ‘The establishment of IAASA is a welcome development which will help to ensure that we continue to preserve high standards of professional behaviour in the accounting and auditing profession. We also welcome IAASA’s responsibility for monitoring the corporate reporting practices of public limited companies, large private companies, etc. which will help to build and maintain public trust in Ireland’s corporate reporting environment,’ he says.

‘The IAASA has started to systematically tackle its very busy agenda and is doing so in a manner which promotes high standards of professional regulation while being sensitive to the reasonable needs of business,’ adds Terence O’Rourke.

Vivian Nathan, managing partner with HLB Nathans says that the IAASA had been ‘well introduced’ and noted its particularly positive contributions to continuing education through its training initiatives.

In spite of the problems faced by accounting firms, there are still many reasons to be optimistic. With an average growth rate of almost 20 per cent this year, the industry is experiencing a productive period. And there are a number of areas that some of the top firms’ managing partners have identified as good prospects looking forward.

For many managing partners, the diversity of business paths in the industry is one key area of opportunity. As Paul Cullen says, ‘The multi-disciplinary nature of the accounting firms places the industry in an ideal position to act as an independent advisor across a whole range of areas. The continual increase in Regulation serves to increase the available opportunity in this area.’
‘Our biggest opportunity is the continuing demand from the marketplace for professional commercial advice. This demand arises from a business environment which is continually becoming more complex, competitive and regulated,’ comments Ronan Murphy, echoing Cullen’s opinion.

John Glennon also feels that increasing regulation will help form a stronger bond between accountants and clients. He says, ‘The ever increasing regulatory burden on business, both nationally and internationally will strengthen the relationship between clients and the accounting profession, allowing for the delivery of a greater breadth and depth of services.’

Meanwhile, Terence O’Rourke thnks that economic growth will be the biggest opportunity for increasing business.’Clearly, an economy that continues to grow is the biggest opportunity for our profession as that drives operational and transaction activity which in turn creates demand for all our services given our central role in advising businesses.’ Among these areas of growth, a number of managing partners identified wealth management as one new area of opportunity for the industry. This was cited by a number of managing partners, including Sharon Gallen of Horwath Bastow Charleton, Niall Garvey of Oliver Freaney & Company, Joe Carr of Mazars, and Geoffrey Lewis of Ormsby & Rhodes.

With the current turmoil in the credit markets, many managing partners are fearful of a recession and subsequent downturn in growth, while attracting talent is also high on the list of problems facing the industry.

Over regulation and compliance issues are seen as other dangers for the industry.
Of the 20 managing partners that responded to our questionnaire, 12 cited the skills shortage as a major threat to the industry, underlining the gravity of the problem., In addition five said that over regulation would also be a threat to the industry going forward. Three managing partners said that the possibility of a recession was a threat, indicating that most managing partners are confident in the Irish economy.

However, there remains a good degree of optimism in the industry, as highlighted by the comments of Julian Caplin, managing partner with Moore Stephens. He believed that ‘there are no major threats facing the industry at this time.’

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