'Secrecy is the aim of those who want limited liability in Jersey'

Since the early 1970s, accountancy firms have campaigned for the right to trade through limited liability companies. This right was finally granted to them in 1989.

Under the 1989 Companies Act, firms can form limited liability companies and be subject to the obligations and rights conferred on thousands of high and low-risk companies. To date, of the Big Six, only KPMG have chosen to incorporate the audit side of its business and protect the personal assets of partners from liability claims.

The same opportunities are open to other major firms. But they have had second thoughts. They want limited liability without the obligation to publish audited information. The firms approached Jersey, an offshore funnymoney haven, where almost anything is available at a price. On the island, the rich and powerful are permitted to write their own laws, as long as Jersey gets something out of it.

On behalf of the major firms, Ernst & Young and Price Waterhouse drafted the Jersey Limited Liability Partnerships (LLPs) law to enable ‘partnerships of significant size’ to register on the island. Jersey finance and economic committee chairman, Senator Pierre Horsfall, told the island’s parliament that the clauses and objectives of the Bill had been approved by the English ICA.

At a time when even unincorporated organisations, such as schools, hospitals and charities, are publishing audited information, one might have thought that the firms keen to receive the benefit of limited liability would at last consider publishing audited financial information. This has not been the case. Article 9(2) of the proposed Jersey LLP law states that: ‘Subject to the partnership agreement, it shall not be necessary for a limited liability partnership to appoint an auditor or have its accounts audited.’ The price of this secrecy is the fee which Jersey will collect from all LLPs registering there.

The firms want the benefit of limited liability and statutory niches, but without any obligation to publish audited accounts.

For more than 100 years, accountants have argued that ‘public accountability through an audit is the price of limited liability’. By pursuing this principle, accountants have been able to advance their niches and fee-earning opportunities.

Today, despite the small company audit exemptions, around 600,000 limited liability companies submit to an independent audit. Now, accountants themselves do not, apparently, believe in any association between limited liability and public accountability via an audit. With accountants explicitly rejecting audits for limited liability businesses, why should anyone else believe in them?

The professional bodies and major firms are urging the UK Government to replicate the Jersey legislation. If the LLP legislation is introduced to the mainland, the Government will be unable to prevent thousands of limited liability companies from re-registering as LLPs and enjoying limited liability with secrecy. Only quoted and large limited liability companies would probably remain subject to a statutory audit. In the short to medium term, the fee income of major firms would be unaffected as their clients would still be required to have an audit. Small and medium-size accountancy firms who audit other companies are likely to suffer the most.

No professional accountancy body has sought a mandate from its membership for the LLP structure, or explained the possible consequences of LLP adoption.

Some defend the Jersey LLP structure because it claims to protect major firms from lawsuits. From the liability perspective, it does not offer any advantage over the full incorporation already available in the UK.

The causes of liability disputes are rooted in arguments about audit quality, the nature and scope of an audit, stakeholder rights, independence, premature signing-off of audit reports, public expectations and an expanding middle class which is willing and able to call professionals to account. The LLP structure cannot obviate any of these pressures. So why bother with the Jersey LLP laws?

The Jersey law has enabled firms to hold the Government to ransom. Give us what we want or we go, they say. Would public opinion tolerate enjoyment of statutory monopolies by firms who do not want to be based in the UK?

With their enormous lobbying power, the professional bodies and firms may persuade the Government to bring the LLP structure to the UK. However, Jersey-style LLPs are unlikely to be compatible with the concept of a ‘stakeholder’ and ‘open’ society.

If the arguments advanced in Jersey continue to be pushed, the association between limited liability, public accountability and audits is likely to be fatally wounded. Ordinary accountants will be the biggest losers.

Prem Sikka is professor of accounting at the University of Essex.