PracticeConsultingComment – LLPs a legislative muddle

Comment - LLPs a legislative muddle

The draft bill on limited liability partnerships seems unlikely to make it to first reading in this parliamentary session, and this will be very disappointing for a number of firms.

But, as it stands, the draft bill shows a lack of understanding of regulated professions. Indeed, the bill’s draftsmen seem to think that regulation alone will satisfy creditors. This is woolly and shows a fundamental misunderstanding of the issue.

Accountants are only regulated in respect to auditing, financial services and insolvency. So is it correct to assume the professions should only have limited liability in respect of the regulated parts of their work?

On the other hand, if professions are allowed to bring unregulated activities into the limited liability partnership, then the issue of restricting entry to this ‘club’ to those who are regulated becomes a nonsense.

The next level of misunderstanding involves monitoring of a profession’s enforcement and compliance with its rules. Very few professions have the resources to undertake this activity. Indeed, in accountancy, even the JMU is limited in its remit to the aspects of a firm’s business which have an impact on auditing and not taxation and other services. So what is the logic here? What does regulation achieve?

Moreover, how can the JMU’s work give any assurance to creditors about the financial well-being of a firm? This applies as much to non-client, third-party creditors such as banks as it does to, say, audit clients who want to know that their auditors can foot any legal bill following action brought against them. To say that a profession is more suitable for LLP status because it is regulated is to misunderstand the nature of the exposure of non-client, third-party creditors.

There is no logic in restricting LLP status to regulated areas of work: there is Big Five expediency at work here. Also, the status of practices already incorporated will become anomalous if this bill does eventually go through.

The draftsmen need to step back and start all over again, with a rational examination of the nature of liability and the potential business risk.

Witold Sawin is a partner at chartered accountants Cooper Lancaster Brewers.

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