City & Business: Doublethink on auditors

NEXT week Unilever will put a proposal to its shareholders that looks batty. It wants their permission to buy professional indemnity (PI) insurance for its auditors. The soapsuds group hastens to add that it has no immediate intention of using this power, but the resolution alone is enough to ring alarm bells in the City.

Why on earth should the shareholders of any company indemnify its auditor against possible legal action, when it is that same auditor they may want to sue if the company were to go bust and they felt misled by the accounts?

Yet Unilever is not alone. Vaux, the brewer, has already passed such a resolution. Rugby, the cement group, is putting a similar amendment to its shareholders. As the agm season gets into full swing, the trickle could become a flood. Slaughter & May, the law firm that seems to be the driving force behind the move, has a blue-chip list of clients including Blue Circle, British Steel, Cable & Wireless, Cadbury Schweppes, Grand Metropolitan and Kleinwort Benson.

The issue is not about to go away. The Association of British Insurers and the National Association of Pension Funds are both against the idea. I understand that Richards, the Scottish textiles group, withdrew its proposal after complaints from a shareholder.

Unilever says it is all a storm in a teacup. The amendments are just good housekeeping, enabling businesses to make full use of fresh powers given to them under the Companies Act 1989. There's nothing sinister about it.

Maybe so, but if shareholders want to be certain that companies are never in a position to indemnify their auditors, they need to act now to stop them incorporating the powers into their articles.

Auditors find it increasingly difficult to find PI insurance. Not surprising really, given that the Big Six accounting firms currently face more than 600 writs - a decade ago the figure was three. And the potential claims are huge. Just in the past week Touche Ross was faced with a pounds 1bn lawsuit concerning Atlantic Computers, the crashed leasing firm, and Price Waterhouse received a pounds 400m claim from the Italian chemical group Montedison. Claims, counter- claims and protective claims are mushrooming. Ian Brindle, PW's senior partner, reckons that unless something is done, there is a good chance of collapses among the biggest accounting firms. Accountants are now pressing the Department of Trade and Industry to end their unlimited liability.

However, getting client companies to pay for PI insurance would achieve nothing, except to cement what is already a cosy relationship between auditors and client company managements. It is easy to forget sometimes that it is shareholders who appoint auditors and pay their fees.

The NAPF has one suggestion that might redress the balance a bit: a meeting where shareholders could put questions to auditors, perhaps scheduled to take place immediately before the agm. It sounds a good wheeze, though one that will have auditors and managements choking on their cornflakes.