THE application of the principle of joint and several liability of auditors is not only unfair, it is also unreasonable and unjust, believes the president of the Institute of Chartered Accountants, Niall Deasy.
Under joint and several liability a firm of auditors which gives a clean audit report to a company that subsequently becomes insolvent can be held 100 per cent liable for damages incurred by someone who acts on the strength of the audit. The law takes no account of the fact that the auditors may have been only partially responsible for third party decisions, explains Mr Deasy. The current legislation results in actions being launched against the auditors, as they are often the only parties in such situations that have any money.
The largest payment in settlement of legal dispute in Ireland was the £77 million paid by accountants Ernst and Young to Icarom and AIB in 1993. Ernst and Young were the auditors of Insurance Corporation of Ireland which was bought by AIB in 1984. AIB subsequently discovered serious and unexpected losses, which resulted in AIB and ICI (which became Icarom) being rescued by the Irish taxpayer.
The settlement was paid by Ernst and Young's professional indemnity insurers and the firm's partners did not incur any liability.
However, the fear of similar litigation is so serious that the British arm of one of the largest accountancy firms, KPMG, has formed a limited company to carry out audit work on its largest clients. The mechanism is intended to protect the firm from any litigation arising from the audits which, because of the size of some of the audit clients, could sink the whole firm.
Other British firms are looking at getting around the problem by where limited liability partnerships are legal.
Neither of these options are open to Irish accountancy firms for legal reasons, according to Mr Deasy.
The Institute of Chartered Accountants In Ireland would prefer to follow the American model, where proportional liability has been introduced. Accountants in the US can only be found liable for damages that are due to their work and not for other factors that might have contributed to a company's demise.
The accountancy profession is not trying to avoid responsibility for its actions, stresses Mr Deasy "We do not have a difficulty in being held responsible for negligent work," he explains.
The move to proportional liability would not reduce the value of the annual audit, which companies over a certain size are required by law to have done by independent auditors, believes Mr Deasy. The lion's share of this work Is carried out by members of Mr Deasy's institute, one of the few professions to have its customer base guaranteed by law.
Audited annual accounts are the major source of independently verified financial information that many people dealing with a company have access to. To reduce the extent to which the auditors might be held liable for decisions taken partly on the basis of the audited accounts could reduce the authority of their work, point out supporters of the principle of joint and several liability. The debate on the issue is still in its infancy in Ireland, despite the Insurance Corporation of Ireland settlement.
In recent years the Institute has made submissions to the Government on taxation issues ahead of the formulation of the annual budget. "We are interested in issues that are macro in nature," explains Mr Deasy. The institute Is currently lobbying on a number of issues that its feels will have a national impact.
The current tax regime mitigates against Ireland as a location for multinational companies to establish their domicile. This is in contrast with France, Germany and a number of other European states where dividend's are not taxed.
A change to the method of taxation of dividends would encourage more multinationals to locate here, and would pay for itself in terms of additional corporation tax revenue believes Mr Deasy. It would be similar in effect to the tax changes which allowed the establishment of the International Financial Services Centre, he ventured.
The Institute has also lobbied for the introduction of tax incentives to encourage trade between the Republic and North. The institute has operated as an all-Ireland body since its inception in 1888.
One change that would encourage cross-Border trade, believes the institute, would be the treatment of time spent working in the north as working abroad for income tax purposes by residents in the Republic and vice versa.
At present anyone resident in the Republic who spends more than 90 days working outside the jurisdiction in any one tax year can claim a tax rebate. However, this does not apply to working in the North or in Britain. There is similar legislation in Britain, but the threshold is higher.
"If this relief was made available it might encourage business people north and south to work on the other side of the Border," explains Mr Deasy.
