In a world where auditors’ liability is top of the legal and political agendas, the role of in-house lawyers such as KPMG’s Christopher Arnull is crucial. Arnull, associate general counsel at the big four accountant, works towards minimising risks that might cause claims for KPMG or other accountants.
“It’s a role that’s concentrated on managing the firm’s risk, trying to ensure claims are minimised and that what we do to manage our risk is of the same high standard as the firm itself,” he explains. “I find that a lot of our clients have people with similar roles to my own.”
But Arnull’s work extends outside KPMG. Much of his time recently has been spent collaborating with the Institute for Chartered Accountants for England and Wales (ICAEW) in working out a response to the proposed Company Law Reform Bill. The bill, currently before the House of Lords in draft form, includes a proposal that auditors who recklessly or knowingly include misleading, false or deceptive information in an audit report should face criminal sanctions. The penalty is likely to be a fine, similar to that imposed for corporate health and safety offences.
Arnull says the offence could be problematic. “It’s going to give rise to a lot of anxiety once auditors realise what they’ve been landed with,” he believes. “It’s going to be a very difficult provision to implement.”
The difficulty arises, says Arnull, with the definition of “false, misleading or deceptive”. Auditors’ reports often involve the auditor giving their opinion on the financial state of a company, and, as Arnull points out, “it seems wrong to criminalise an opinion”.
He adds that the accounting industry is already heavily regulated, with rigorous disciplinary procedures for those who break the rules. “If the disciplinary process is adequate, why bring in a criminal offence as well?” Arnull asks. The bill also proposes limiting auditors’ liability with the aim of preventing such mammoth claims as the £2.6bn case brought by Equitable Life against Ernst & Young. Like many others, Arnull welcomes the recent settlement of the case.
“It sends a message to auditors that, when faced with huge claims, they shouldn’t automatically try to settle,” he says. “For auditors there’s always going to be uncertainty, but you can probably stand firm – and the message is that you should. The corresponding message to claimants bringing claims without particular merit is that they should not do so lightly.”
The proposed cap on auditors’ liability has pleased and surprised the profession. “It’s almost a Holy Grail that the auditors never thought they’d get,” says Arnull. “We were expecting some sort of mechanism for proportionate liability.”
If the bill goes through Parliament, it ought to make Arnull’s life, and that of the accountants and auditors at KPMG, much easier. Arnull reports to risk management head Neil Lerner rather than general counsel Vanessa Sharp, underlining the priority KPMG gives to this issue.
None of the firm’s seven in-house lawyers work in a legal department, each being assigned to a different section of KPMG’s business. Sharp is in charge of any corporate activity, although this is minimal. Linklaters is the firm’s main legal adviser of choice, having advised on topics such as US law for KPMG’s New York office. Arnull will also turn to 3/4 South Square’s Robin Knowles QC, instructing him directly when the need arises.
“Whatever you may think of a QC label, it’s very widely respected and understood, and it’s tremendously useful if you want to get an opinion on a particular point,” explains Arnull.
He says that from his point of view, instructing Knowles directly saves cost and time. “I can prepare instructions for counsel as well as a law firm,” Arnull argues. Knowles has recently advised on contracting issues, extending the firm’s policy on areas of risk.
But Arnull is keen to keep what he does separate from what KPMG does as an organisation. He may campaign on behalf of auditors, but he does not want to get involved in auditing. “I don’t know that lawyers should interfere with the conduct of an audit. Lawyers aren’t best placed to tell auditors how they should audit,” he points out.
Arnull is, however, concerned with making sure that the auditors can do their job smoothly and with no hindrances, particularly when working with organisations that are not large, private corporations.
“I’d like to see the public sector having a more flexible approach to contracting with private advisers like us,” he says. “I sense that they’re reluctant to move from a standard position.”
It is just one more area of change in a sector that looks likely to be under constant review for years to come.
Associate general counsel
|Associate general counsel||Christopher Arnull|
|Reporting to||Head of risk management Neil Lerner|
|Current global panel||Linklaters and Robin Knowles QC, 3/4 South Square|