It’s also a vindication of his decision that Ernst & Young should publish annual reports, a move that was, he says, applauded by corporate clients but an example not – so far, at least – widely followed by other accountancy firms.
According to Land, it was the work that Ernst & Young and Price Waterhouse undertook with the Jersey government back in 1997 that first concentrated the mind of UK ministers on the structure of professional partnerships.
The idea that two of the biggest accountancy firms plus, conceivably, legal, architectural and engineering and other partnerships, might take flight and register offshore looked like a real threat to then deputy prime minister Michael Heseltine.
With the arrival of a new Labour government keen to be seen to be supportive of business, the momentum continued. And Land is surprisingly sanguine about the process from that point.
‘And then one hoped it was just a matter of time as they began to turn their manifesto into reality. But I’ve no doubt whatsoever that ourselves and Price Waterhouse drove it onto the government’s agenda because of the Jersey idea. It took a long time but you can’t expect to be at the top of the list of legislation. Why should we be? But they took it on and delivered it in their first term.’
And yet, so far, there are few signs of a rush to LLP adoption. Companies House has issued guidelines but has received few enquiries. Back in 1998, Accountancy Age wrote that ‘firms are expected to rush towards adopting LLP status once it becomes available.’
But to date, Ernst & Young is the only firm to make a clear declaration that it intends to move to LLP status. Other Big Five firms have fallen quiet and the mid-tier is all but silent.
So why the hesitation? Land says it is at least partly down to forces of conservatism within the profession.
Not everyone will be as happy as he is with the new LLP legislation. Many will find the reporting obligations onerous and will find the degree of disclosure too demanding.
‘To become an LLP in this country you have to adopt the same reporting obligations as if you were a limited company. You’re a corporate entity. You have to file your accounts, you have to have them audited and so on.
‘I think the trade off that says you can have LLP status but you have to prepare and file and have audited accounts is a perfectly reasonable obligation.
But clearly in a general partnership world, many may perceive that there is an advantage in that you can keep your financial information private – at least from the general public.
‘I think the legislation that the government has come up with is absolutely logical. It’s easy for me to say that, because we’ve already crossed the Rubicon of having our accounts published. But we didn’t do that because of the LLP. We did that because we thought it was a good thing to do.’
And the advantages are, he says, plain to see. The LLP structure protects the personal wealth of partners and means that they are liable for the negligence or mistakes of other partners only to the extent of the capital that they have put into the partnership.
It is a much-needed protection, says Land, perhaps not so much in the present, but certainly in times of recession when shareholders have in the past pursued the potentially deep pockets of auditors or professional advisers.
‘I think that is easy for people to forget that in our profession – or, I think, in other professions like architecture and consulting engineering – there was real concern that, in an increasing litigious environment, the law was unfair to us. The doctrine of joint and several liability is a pretty harsh doctrine. There was a lot of litigation coming out in the nineties. Litigation tends to come out during a recession because that’s when companies fail and that’s when, rightly or wrongly, people are looking for scapegoats.
‘Of course we’ve been in a relatively good economic environment in the last few years. But that’s not say that there isn’t litigation around in our industry across the world – there’s plenty of it. But people forget, or may not remember as clearly as they should, the sort of environment we had in the early nineties. So I think that concentrated our minds and PW’s minds. We said: “Look, we can do something to give us some protection. That must be a good thing.” I just think one or two businesses might just have forgotten that sort of period.’
Protecting partners from undue risk means firms can attract and retain better partners. Retaining staff and partners has advantages for firms and clients, who stand to benefit from better quality of work and greater continuity.
‘One of our arguments to the government when we were seeking this legislation was that if the risks are perceived to be too high then you are going to deter people from entering this profession and other professions,’ says Land.
‘And clearly if you’re a partner in the firm you put everything at risk in some doomsday scenario. Under LLP you put your capital at risk, so you’re still risking quite a lot. But there is a difference. You can draw a line in the sand.’
The financial transparency delivered by publishing an annual report holds few surprises for Ernst & Young these days.
The firm has been producing annual reports for four years. And while the first report excited some attention, it has since caused fewer ripples.
Partners, staff and the rest of the outside world have, says Land, responded positively. ‘We’ve published now for four years. We found to some extent that it was a non-event. We have not had shock-horror from clients. The media took a lot of interest in it the first time round and then once the novelty wore off, they haven’t taken so much.
‘When part of what we do is help and advise on best reporting practice and good transparency of financial information, it does seem to me somewhat strange that we don’t practise what we preach.
‘We are an arm of regulation in relation to at least our audit business and it does seem to me a little bit strange that we should hide our financial affairs under the veil of a general partnership.
‘We haven’t lost anything. It’s given us much more transparency internally. And sure, quite rightly – or very understandably – people say: “Why is there such a big income gap between one group or another.” They are all perfectly reasonable questions. You might not like them all the time. But they are all perfectly reasonable questions.’
However, Land acknowledges that reports require time and effort. ‘But that’s the business we’re in,’ he says. ‘There’s no downside. I regret that we didn’t do it much earlier to be perfectly honest.’
Of course, one crucial matter that reporting clarifies is fee income. And for many in the profession, the traditional secrecy around fees and the income of top partners will be hard to surrender. But if other firms are concerned that clients will demand a justification of profit levels, they can take heart from Ernst & Young’s experience.
‘Clearly it gives people, the media, some ammunition because it gives them some facts. I think a lot of clients, particularly the large ones, understand we are running a big business, that we do add a lot of value, that we do take a lot of responsibility, and that if we’re going to have and keep the right people then we need to be financially quite attractive.
‘If things go well we do enjoy good incomes and I’d be the first to say that. Our business is not one where you’d ever get capital appreciation because we don’t have shares. I’m not saying we deserve to, I’m just saying that our sort of business does differ from a corporate entity, where the directors might get good salary packages if they are doing well and also capital appreciation. It’s a different sort of reward structure.
‘A partnership today is not some exclusive club. We have about 450 partners. KPMG probably 700 partners. There’s a talent war going on amongst those partners. To think that they just sit around in some exclusive club and that they’re not being offered jobs by competitors or others in the market is a nonsense. If we’re going to retain good people we have to be able to earn enough profits to compete from a reward point of view.
‘Whether the market is putting the right value on the skills is another thing altogether. But the market is there and if we don’t reward our partners broadly in line with the marketplace, we will lose those partners.’
And, says Land, it’s an argument that business recognises. ‘Our main customer base does recognise that argument, no doubt.’
To view Ernst & Young’s annual report visit www.ernsty.co.uk
LLPs – what the Big Five are doing
PricewaterhouseCoopers is adopting a wait-and-see approach to whether or not it will go down the LLP road.
PwC, along with Ernst & Young, were at the forefront in lobbying for LLP legislation, threatening to go offshore to Jersey where the firms helped draft similar legislation. A spokesperson for PwC said the firm would look at the practicalities once the legislation was enacted and that it would need to be certain various conditions were appropriate for the partnership as a whole.
The financial disclosure element of the legislation could prove interesting for the firm, which was on the receiving end of an attack from Mike Rake, KPMG’s senior partner, who argued PwC should publish full financial accounts irrespective of LLP requirements.
The situation at KPMG is slightly different from the other Big Five firms although it is known to be actively considering LLP status. Several years ago it took the radical step of incorporating the majority of its audit practice, now known as KPMG Audit plc. It took the step because it believed that audit represented the area of greatest risk to the firm and, therefore, to the partners themselves.
A bi-product of incorporation was that the firm was required to produce accounts and so decided to publish an annual report for the whole firm, a move that only Ernst & Young matches.
Big Five firm Deloitte & Touche remains as yet undecided as to whether it will jump on the limited liability partnership bandwagon or not.
When asked for the firm’s opinion on LLPs, a spokesperson responded: ‘At the moment we’re undecided, but we’re reviewing our options.
‘We’re deep in the decision-making process and we’re not quite sure yet.’ He added: ‘We’re not committed to it either way.’
A spokeswoman for Andersen, said it was not being high profile on the issue.
An official statement on LLPs reads: ‘We welcome the legislation in principle and we have been involved in discussions. We are pleased that it is possible for professional firms to be able to become LLPs. We are still considering our position as regards our LLP status.’
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