UNHAPPY the head that wears the partnership crown. With accountants anxious about their exposure to unlimited penalties for negligence over audits, solicitors too are increasingly nervous about the consequences of major errors. The rewards of partnership may be highly desirable but the price tag in terms of stress and financial exposure is becoming exorbitant.
“I’ve been thinking about this for the past ten years and it is getting worse,” says Richard Turnor, of Allen & Overy. “The complexity of corporate affairs, the growth in complicated deals, options, derivatives and the implications of something buried deep in the small print all make it much more likely that if something goes wrong then you, as a professional adviser, will be held responsible.”
Although the circumstances of solicitors and accountants are not identical they both operate in a culture in which redress on a massive scale is now expected in the event of error — no matter how small. “I agree that professionals should have to stand by their work and have an incentive to maintain the highest standards,” says Turnor. “The problem arises over the scale of penalty when things go wrong. In the case of derivatives, for example, a lawyer will be paid, say, £3,000 for writing an opinion. But there could be billions of pounds at stake for which, conceivably, the lawyer could be sued. There is a disproportion between what we are paid and how much we are exposed.”
The debate about accountants capping their liabilities over audits illustrates the point well. Competition for audit work means that fees are relatively low while the expectations of the public — notably shareholders and policyholders — are unreasonably high. According to Philip Hill, of Clifford Chance, however, there is still a lot of confusion about the possible solutions — especially now that the Department of Trade and Industry has just done what appears to be a volte-face on its longstanding opposition to “proportionate liability”.
The problem is that when things do go wrong — as in the case of Equitable Life, for example — it almost certainly entails errors, even fraud, by a number of people. But professional advisers are particularly vulnerable because they are nice big targets and are believed to have deep pockets.
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The answer for a growing number of law firms (including big City names such as Clifford Chance, Allen & Overy and DLA) is to restructure into a limited liability partnership (LLP).
Taking advantage of the Limited Liability Partnerships Act 2000, partnerships have been able to limit their liability, albeit at the cost of having to be much more open about their financial affairs. Initially the take-up was expected to be small but a trickle is now well on the way to becoming a flood.
The main cause of this is fear, post-Andersen, of the Armageddon scenario ��� the one-off catastrophic error that brings down a whole partnership so that even the partners’ houses (because of their “joint and several” liability) are sucked into the maelstrom.
As Trevor Moss, of the leading insurance brokers Alexander Forbes, says: “I predicted that 2004 would be the year of the LLP — and it’s turning out that way. I think that the LLP structure is good for the profession. It encourages law firms to have robust systems in place and be more thorough about a wide range of management issues.”
Or as one lawyer says: “It’s similar to the fear of having your child abducted. It almost certainly won’t happen but the fact that it could happen shapes the way that you live your life.”
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The latest among the LLP converts is Lawrence Graham, whose new status took effect from the beginning of last month. “I know of three firms who are thinking of following our lead,” said Bill Richards, a senior partner. “I am sure they will go for it next year and, what’s more, I think that within three years a City law firm which is not an LLP will be quite an oddity.”
One complication is that the American and English versions of LLPs are different. Moss says: “Insurers feel that the UK structure of an LLP is much more robust and clearer in its definition of liability than its American equivalent.”
For international firms this poses challenges. For example, Baker & McKenzie restructured itself in July, getting rid of its Chicago-based worldwide partnership so as to enable each jurisdiction to make its own arrangements. Hence the partnership in America is now an LLP but its London-based partners are not. Gary Senior, a partner at the firm, says: “Looking at a worst-case scenario an LLP would provide individual partners with protection. However, setting up an LLP across Europe is not easy. We’ve not yet made a decision about it although it is very much under consideration.”
One increasingly important factor in these discussions is that potential new partners may prefer to join an LLP rather than a riskier traditional partnership that he or she does not fully know or trust.
A firm that is standing out against the trend, however, is Irwin Mitchell. “We’re keeping it under review but have no intention at this point of going for an LLP,” says Howard Culley, the managing partner. “It’s a question of looking at the risk factors and the shape of our business in the context of an LLP. Then we compare it to the convenience and confidentiality of the structure we already enjoy.”
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Mind you, it only takes one disaster to shift opinion dramatically. We live in an era where the previously unthinkable seems to happen weekly. An LLP may prove to be a small price to pay to sleep easily at nights.