PROFESSOR OF ACCOUNTING
UNIVERSITY OF ESSEX
The government is likely to present the Limited Liability Partnership (LLP) Bill to Parliament in summer 1999 and it is expected that it will be enacted by the end of the year. As accountancy firms pushed for this law it is appropriate to look at the present and likely outcomes.
The genesis of the UK LLP legislation lies in the decision of Jersey (an UK Crown Dependency) to introduce the LLP law in 1996. The lawyers hired by Price Waterhouse and Ernst & Young at an estimated cost of £1 million privately drafted this law. To quote a Price Waterhouse partner, Jersey’s senior politicians had assured the firms that the legislation would be ‘nodded through’. However, the legislation was quiet in the style and format preferred by the Jersey draftsmen and had to be tidied up. The Jersey LLP Bill worried some legislators who sought help from outside the Island, including the present author, in making sense of it. This enabled critics to draft some amendments, a process which delayed the passing of the Bill. The debate also highlighted the inadequacy of the insolvency provisions of the Bill and the Jersey government was unable to draft these until May 1998. The LLP Bill was only completed in September 1998. To date, no major firm has abandoned its UK base in favour of Jersey. Jersey was only used as a lever to secure concessions from the UK government.
The Jersey LLP legislation caused considerable turbulence on the Island, something which also brought international scrutiny to the Island’s affairs. The ‘scrutiny’ of the LLP legislation was organised by Deputy Gary Matthews. In return, the Jersey establishment labelled the opponents as ‘enemies of the state’ and accused them of ‘unJersey-like activities’. Gary Matthews lost his seat in Jersey States and he was forced to leave the Island. During the LLP debates, Senator Stuart Syvret highlighted the fact that a member of Parliament was connected with the promotion of the Bill even though his law firm was behind the Bill. As a result, Senator Syvret was suspended from Parliament for an ‘indefinite period’. After some exposure in the international press and pressure by the UK MPs, Senator Syvret was eventually restored to Jersey States. However, he brought a case against the Bailiff (i.e. Speaker in Jersey States) and the UK for violation of his human rights. The Strasbourg-based European Court of Human Rights has accepted the case. The impression that the Jersey legislature is available for hire to enable well connected businesses to draft and enact their own legislation also raised alarm bells in various Western countries and was factor in the UK Home Office’s decision to intervene in Jersey’s internal affairs. Without any prior consultation with the government of Jersey, in January 1998, the UK government commissioned an investigation into the state of financial regulation in Jersey. The resulting report (the Edwards Report) published in November 1998 is critical of the Jersey’s LLP legislation, amongst other things.
The demand for UK LLPs came as the Law Commission rejected the accountancy firms’ demand for ‘full proportional liability’ and other liability concessions. The firms’ response through Jersey was probably seen as heavy handed in government circles. Consequently, the government was not going to bow down to the firms' demands. Inevitably, the UK version of LLPs had to be different from Jersey’s. The major differences relate to insolvency aspects, the need to publish audited financial statements and the importation of the corporate legislation into the LLP Bill. The firms’ primary concern, at least as publicly expressed, was to secure liability concessions. But they already had suitable liability safeguards. For example, under the Companies Act 1989, the firms could trade as limited liability companies, a vehicle which offered considerable protection to negligent and non-negligent partners. In contrast, the LLP route offers some personal protection to non-negligent partners only. So the firms will have LLPs, accompanied by the need to publish accounts and stringent insolvency requirements. This is not what they set out to secure through the Jersey version. Traditionally, the accountancy industry has sought to advance its interests through lobbying and lunchtable meetings with policymakers. In contrast, the Jersey excursion has probably portrayed the firms as hostile. Consequently, their credit is eroded and they will not easily be able to secure further liability concessions.
The LLP legislation is of the no use to any sole practitioner. Interestingly, the Association of Chartered Certified Accountants (ACCA) also joined the campaign to secure LLPs in the UK. However, the LLP vehicle is of no use to most ACCA members who frequently trade as sole practitioners.
Though the accountancy industry initially called for LLPs for ‘professionals’, it soon changed its tact and called for LLPs for everyone. Thus entrepreneurs would be able to trade as sole traders, partnerships, limited liability companies and LLPs. The Trade & Industry Select Committee has also urged the government to make LLPs available to all, a recommendation which is likely to be accepted by the government. This will have major consequences for regulation and the regulatory powers of the accountancy bodies.
The UK currently has some 3.5 million businesses. Of this some 1.2 million trade as limited liability companies. Of this some 600,000 are currently subject to a full or modified audit. If a large number of other businesses convert to LLPs, a number of pressures are likely to be generated. Firstly, an expansion in the audit jurisdiction (i.e. LLPs need to publish audited financial statements) may be welcomed by some as it expands the fee earning opportunities for accountants. To serve this expanded market, the demand for accounting graduates is likely to increase, leading to a ‘squeeze’ on graduate recruitment for other sectors with considerable implications for the UK economy. The LLP audit market will be quite different from the contemporary audit market. Many LLPs are likely to be small/medium businesses who would resent what they would regard as burdensome regulation. In this market, the entrepreneurs will feel that the audit costs impinge upon them personally. They would resist and resent the burden, especially as auditors do not owe any ‘duty of care’ to individual stakeholders. As many of the businesses that fail are also small, the entrepreneurs are also likely to be more critical of auditors and more likely to sue auditors for real/alleged negligence.
Faced with implications for the UK economy and calls for deregulation,
the government is most likely not only to apply the present small/medium
sized company audit exemptions to LLPs, it is also likely to considerably
raise them. This may also appease small practitioners who are not exactly
enthusiastic about the regulatory regime and its costs. The raising of
the small/medium-sized company/LLP definition may be welcomed by the ICAEW,
but it will not be welcomed by the ACCA whose regulatory role depends upon
continuing audit of small businesses.