Venture capital threatened by Big Six move

The Big Six leading accountancy firms are threatening the future of the venture capital industry by planning to operate a cartel under which they will limit their liability on due diligence work, claims the British Venture Capital Association.

It says in a submission to the Office of Fair Trading (OFT) published yesterday that the proposed agreement by such firms as Coopers & Lybrand, KPMG and Arthur Andersen would "seriously restrict competition" between the accountancy firms. It also argues that it would "interfere with the rights and ability of BVCA members to negotiate agreements for due diligence services on an individual basis".

The move follows the Big Six's application to the OFT last autumn for approval of a pounds 25m cap on damages arising out of claims, mostly in the management buyout field, as part of the firms' long-running campaign to protect themselves from companies' increasing willingness to sue. One firm, KPMG, has already incorporated its audit arm and at least two others are planning to set up limited liability partnerships in Jersey to give their partners greater protection from law suits.

Under the Companies Act, accountants are prevented from agreeing a limit on their liability relating to audits. But they say that the Department of Trade and Industry has encouraged them to tighten up their risk management by limiting liability in such areas as corporate finance.

Martin Gagen, chairman of the BVCA's legal and technical committee, said he could understand accountants' concern about the prospect of large liabilities, but added that the agreement was "an unwarranted uniform imposition". The terms might appear reasonable, but in fact "sought to protect negligent firms by an unfair transfer of risk to financiers suffering a loss".

"The Big Six are exploiting their 'cartel' position by reducing the level of competition amongst them and are removing the rights of venture capital firms to negotiate terms for accountancy services on an individual basis."

However, Graeme Robinson, an Ernst & Young accountant who sits on the committee, argued that the planned agreement was the result of discussions with venture capital houses and followed legal advice.