Limited liability for KPMG

KPMG, Britain's second largest accountancy firm, is this week expected to announce that it will turn its audit operation from a partnership into a company in an attempt to protect itself against mounting negligence claims.

The pioneering move would place audit partners in a similar position to directors of limited liability companies rather than making them potentially liable for the total loss if the company collapses.

Accountancy watchers say it could trigger a rash of similar decisions at other accountancy practices and even other professional firms, such as solicitors and surveyors.

Coopers & Lybrand, Britain's largest accountancy firm, and other leading practices, such as Price Waterhouse and Ernst & Young, are known to be investigating the issue, though they are not as far advanced as KPMG. Law firms, which have started to encounter negligence claims of the scale that have been haunting accountants in recent years, are also beginning to consider the move.

KPMG, formerly known as KPMG Peat Marwick, says it has taken a lead on the issue because, since it audits about a fifth of Britain's public companies, it has a greater interest than most in protecting itself in this way. With audit and general accounting work taking up 200 of the firm's 600 partners and bringing in about pounds 200m of the pounds 600m total fee income, it is a "bigger chunk of our business than for anybody else", says senior partner Colin Sharman. KPMG has consistently maintained that it is not as exposed to lawsuits as some of its rivals, but it is estimated that the biggest firms have in recent years spent about 8 per cent of total revenues on costs associated with claims. The firms also suggest that the threat of personal bankruptcy is putting increasing numbers of people off becoming partners.

The incorporation plan is designed to offset this, but it only offers partial protection. Partners would no longer risk losing their homes, but they could still be sued personally and the firm wiped out.

Mr Sharman added that since the firm announced in June of last year that it was examining the change closely it has won widespread support from clients and gained approval from regulatory authorities such as the Department of Trade and Industry and the Bank of England.

However, within the profession, there is a view that limiting liability goes against current corporate-governance thinking, which holds that auditors are accountable to shareholders and should not therefore make deals with directors.

Acceptance of the plan would also lead to much greater disclosure of financial information about KPMG.