TWELVE YEARS AGO senior partners from the UK’s top 60 accountancy firms gathered in a fashionable London restaurant.
It was the year that the Limited Liability Partnership Act was introduced. The partnership structure had served the accountancy profession well for centuries – allowing partners to share profits and shielding firms from the demands of shareholders, analysts and corporate governance standards.
But in an increasingly litigious business environment, partnerships had one big drawback: Partners had unlimited liability for any losses or legal claims for damages from disgruntled clients.
In theory, partners could lose all their assets, including their home, any shares and car, in the event of an “Armageddon” legal claim from a client or a big loss. The cost of personal indemnity cover was rising. Some of the big accounting firms even talked about moving their services offshore if they didn’t get LLP status, says Fergus Payne, partner at law firm Lewis Silkin.
Limited liability is designed to give partners protection from catastrophic legal claims, while allowing them to keep the partnership structure. It seemed like an obvious precaution to take, but Phil Shohet, of Kato Consulting, who organised the dinner at the French restaurant, recalls that that assembled partners showed little appetite for their firms becoming LLPs.
Fast forward 12 years and LLPs have become the norm – at least for the larger accountancy firms. Around three in five of firms in Accountancy Age’s top 50 league table for 2011 said they were LLPs. How have they fared? And what are the advantages and disadvantages of becoming an LLP?
The initial scepticism reaction about LLP status was partly because the accountancy profession is, generally, a cautious and conservative profession. “Partnerships have always been very secretive profession,” Shohet says.
In 2001, Ernst & Young became the UK organisation to become a LLP. The rest of what was then the Big Five accountancy firms followed suit. The collapse of Arthur Anderson in 2002 after the Enron scandal, which was partly blamed on questionable accounting, highlighted the firms’ vulnerability to lawsuits, although Andersen’s collapse was because its reputation imploded.
For those switching from partnership to LLPs, the main change has been the requirement to publish annual accounts – just like their clients.
“One of the biggest impacts of being an LLP is around openness and transparency,” says Scott Barnes, chief executive officer at Grant Thornton, the UK’s fifth biggest accountancy firm which became an LLP in 2004. But the disclosure requirements haven’t caused Grant Thornton any headaches, Barnes said. “It just becomes part of the DNA that you file accounts and become a public interest entity.”
One advantage of LLP status is that it allows firms to keep a partnership structure, which is the “most appropriate” structure for accountancy firms, says Richard Bint, senior partner at PKF, another LLP firm.
Below the top 20 of accountancy firms, however, the adoption of LLP status has been quite slow, particularly when compared to the legal sector.
Payne says that all but around one of the top 50 law firms and most of the top 100 firms are LLPs.
What are the advantages of remaining a traditional partnership?
Jonathan Fox, managing partner at Saffery Champness, says: “A partnership between like-minded individuals who recognise that they are all dependant on one another. It promotes collegiality and a shared sense of direction that I know, having worked in much larger “corporate ” and structured professional services firms, can be lacking.”
He adds that the firm has no plans to become an LLP but had not ruled it out.
Other firms, such as Haines Watts, a top 20 accounting firm, use a franchise-type system, which devolves power to regional offices while maintaining a national brand.
Haines Watts’ 50 UK offices are a mixture of partnership, LLP and limited company, says David Fort, a partner at the firm. Haines Watts is a member of Geneva Group International, an international network of law, accounting and consulting firms.
Some of the firms’ previous attempts at new business structures failed. In 2010 a former business unit of Haines Watts had a company voluntary arrangement approved by creditors. The unit, called HWCA, was formed in 2005 from some Haines Watts practices. HWCA struggled and was absorbed back into Haines Watts regional businesses through management buyouts. It changed its name to Sixonethreeone.
In 2003 Accountancy Age reported that Haines Watts, then BKR Haines Watts, halted plans for stock-market floatation. BKR Haines Watts had been in negotiation with HW Fisher about combining and floating on the AIM market, but the talks were derailed by “market issues”.
Given the recent problems faced by RSM Tenon – a listed accountancy group which in January made a profit warning and announced the departure of its chief executive and chairman – few expect many big accountancy firms to go public in the near future.
LLPs are a safe choice for accountancy firms. “Over time traditional partnerships will become less common because there is no good reason to trade with unlimited liability,” Payne says.
Do you have an investigation looming large over you? Kingsley Napley's Julie Matheson goes through the best strategies to manage the process
An accelerated entry route into CIMA for CIPFA members is launched
Grant Thornton will conduct the audit of Tern following the resignation of Jeffreys Henry
The International Accounting Standards Board (IASB) have announced that Françoise Flores will join 1 January 2017