LAW SOCIETY: Audit threat for accountants By Jean Eaglesham in Paris
(Financial Times, 2 Nov 1999, p. 2)

 Accountants face the threat of being sued by the Law Society for fraud committed by
  solicitors they have audited, following a landmark court ruling.

The decision involving KPMG, one of the Big  Five accountancy firms, could significantly
 increase the professional indemnity premiumspaid by smaller accountancy firms. It affects the mandatory annual audits of more than 8,700 solicitors' firms and could have a knock-on
 effect on accountants' liability for the audits of other regulated firms.

On Friday, the High Court ruled that KPMG owed a duty of care to the Law Society for an
audit of a fraudulent firm of solicitors.

 Every firm of solicitors has to produce an annual accountant's report for its regulator, the Law  Society, certifying that clients' monies are being held safely.

The society has been locked in legal battle with KPMG over certificates it produced for
 Durnford Ford, a small firm of solicitors, between 1989 and 1991, when about £8m of
 client money was stolen. The firm's senior partner, Graham Durnford Ford, was later jailed
and the stolen money repaid to clients from the Law Society's compensation fund.

In 1990, the society sued KPMG to try to recover the £8m. If Durnford Ford had not produced a certificate in 1989, the society argues, it would have used its powers toswoop on the firm, freezing client money and preventing much of the fraud.

 The case trial has been split in two. The question of whether KPMG was negligent in
  producing the certificate, which it denies, will be decided at a later hearing.

The issue decided in Friday's test case was that KPMG owed a duty of care for the
 certificate to the Law Society, as well as to the firm itself. The judge awarded costs, totalling  hundreds of thousands of pounds, against KPMG and refused leave to appeal. KPMG said it would study the full judgment before  deciding whether to seek leave to appeal.

If the ruling is not overturned, the society is almost certain to bring further claims against
accountants in similar cases of fraud by solicitors. "We are delighted with this landmark  judgment," said Robert Sayer, the society's president. "The profession as a whole picks up the bill when clients need compensation. We should be able to expect that the professionals we use do a competent job for us."

The ruling could increase professional indemnity premiums for accountants that do a lot of audits for solicitors. While this work is only a very small part of the Big Five firms' revenue, it can be a significant source of income for high street firms.