UK: Accountants’ Exposures – A Snapshot From Clyde & Co

Last Updated: 8 August 2014
Article by James Roberts

Welcome to the new look Clyde & Co accountants' newsletter. In this and forthcoming editions, we will look at a range of issues affecting accounting firms, with a core focus on liability and regulatory exposures. We will also consider the wider context in which firms wrestle with exposure risks (for example, the interface with employment, and the growing threat to professional services firms both in the UK and overseas from cyber liability and data breach) as well as the knock-on effects of developments affecting audit/accountancy clients.

In this first edition, in addition to introducing two key liability themes, to which we will return in future editions, we offer a practical guide for accountancy firms to the shared parental leave legislation coming into force next year, accompanied by a digest of some recent cases of the last 12 months in the core areas of liability, regulation and tax.

Changing business models

Turning to the present, at an individual firm level, in the UK we have finally begun to see the take-off of "Alternative Business Structures" (ABSs), particularly the new facility for "multidisciplinary practices", which provide opportunities for developing new business models. As ever, alongside such opportunities come challenges. For example, a significant feature of the Mehjoo case (upon which we comment later), is that the defendant accountants were "general" practitioners, and were therefore not to be held to the standards of specialist advisers on complex tax issues. Compare this to the 2007 decision in the Earl of Malmesbury v Strutt & Parker, where a general practice surveyor within a major national firm was held to the standard of the firm's specialisms taken as a whole, on the basis that recourse to a specialist department was reasonable and appropriate. The distinguishing feature would appear to be the presence, in Malmesbury, of specialist expertise elsewhere in the firm. How might that play out in an era of multidisciplinary practices, where the appropriate recourse might now not simply be to a specialist in your own profession, but potentially also to other allied professional fields? The Prudential decision also begins to look even more archaic (and policy driven) when one may start increasingly to see accountants and lawyers working even more closely together under the same roof.

Regulation, regulation, regulation

The professional regulators do not seem to have focused on the practicality of working together to supervise firms with the result that ABSs will now be facing, at least in the short term, overlapping regulators. Notwithstanding the push in favour of regulator co-operation, regulators can be jealous of their own patch, and one does not have to be too sceptical to anticipate that boundary disputes may arise.

Adopting a broader perspective, these are also naturally themes that play out across geographical boundaries, given the expanding global footprint of professional services. High-profile examples provide the clearest demonstration that, in the interests of facilitating crossborder enforcement, regulators from different jurisdictions are now ushering in an era of unprecedented co-operation. There are numerous examples of UK professionals on the receiving end of "long arm" US jurisdictional enforcement, fully aided and abetted by UK authorities. In 2013, for example, the FCA received more than 1000 requests for international assistance. Indeed, cases such as Innospec (2010) show that the UK's prosecuting authorities see positive advantage in joining up with their US counterparts, albeit that our court system did not at that time facilitate a joined up global prosecution settlement in both jurisdictions. This is likely to be remedied by the introduction (in February 2014) in the UK of Deferred Prosecution Agreements. The UK's published guidance gives some cause for confidence that we will manage to pull off the benefits of DPAs for defendants, without some of the abuses frequently seen in the US (including against large professional service firms).

Whilst co-operation may currently be in favour, there are also still significant areas of conflict between regulators, and accountants and other professional service firms can get caught in the middle. The SEC tussle with its PRC equivalent over access to documents held by the largest accounting firms which might, if disclosed, cause the firms to be in breach of Chinese "state secrecy" laws is just one example. That long running tension has been mirrored for a large accountancy firm based in Hong Kong, resulting in a May 2014 Hong Kong court decision ordering disclosure, notwithstanding the concerns about Chinese secrecy laws. Whilst this conclusion was based on a decision that, there was no evidence that disclosure of the relevant documents to the Hong Kong regulator would breach the PRC's nondisclosure rules, there remains the very real risk for the firm that the PRC regulator may take a different view.

Closer to home, we are also reminded that such "secrecy" laws preventing disclosure are not solely the product of a muscular emergent economy with a different political and economic tradition. In 2013, the UK's Court of Appeal had to grapple, in the Servier Laboratories case, with the so-called French "blocking statute", which has been in place since 1968 and contains a very broad prohibition on disclosure of documents, outside France, for the purposes of evidence in foreign proceedings. The English court held that this was no bar to the making of an ordinary order for disclosure in English proceedings, even if compliance with that order would involve the party acting illegally under French law. The Court of Appeal took comfort that, on the facts, the evidence suggested that the French authorities were very unlikely actually to take action against the party for breach of the "blocking statute". How much comfort, however, would that be for the party itself?

The nature of regulatory attention is also becoming ever more intense in its focus. The role professionals, particularly accountants, play in the financial affairs of their clients, and the potential exposure to fraud or to the funding of terrorist or other criminal activity, means that they will always be a significant focal point for regulators. We are currently seeing a shift from enforcement activity based on adverse outcomes (actual money-laundering, actual bribes etc) to a focus on the adequacy and effectiveness of internal processes and compliance policies, and scrutiny of whether firms are "living the process". In the past 18 months significant fines have been imposed on banks for failures to comply with AML rules, and on an international broker for its "unacceptable" approach to bribery in overseas markets. In none of the cases was there any evidence of actual money laundering or bribery - the regulators' concern was solely that there was a risk of breach.

The focus across many regulators is now on individual personal responsibility, rather than just entity liability – and where there is an entity risk, the focus across many regulators is on enhancing the scale of financial penalties which can be levied. The MG Rover case is an example of the manifestation of this trend within the accountancy profession.

Looking forward

What do we see ahead? We predict that the rise of the regulators will continue to be a marked feature, as well as cross-border issues. The largest firms have long demonstrated exceptional ability to develop finely honed risk management practices to respond to these challenges, and we have no doubt that will continue. Whilst firms have long moved away from reliance on insurance as an antidote to liability exposures (given the broader ramifications that insurance cannot remedy), there is nevertheless no doubt that traditional insurance solutions can be reinvented in order to better serve the needs of accounting firms and professional service firms of all kinds, and this is another theme that we will explore in future editions of this newsletter.

Download Newsletter here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
James Roberts
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.