Audit firms limit claims with new legal structures

More accounting firms are changing from partnerships to limited liability partnerships to protect their executives from claims that cannot be covered by the businesses.

PricewaterhouseCoopers (PwC) is the latest to change its structure, joining others like RSM Eastern Africa which made a similar decision last year.

Analysts say the move is part of a trend to protect partners at a time of increasing regulatory actions and litigation globally, with the major accounting firms fined billions of shillings overseas for professional misconduct.

“We are pleased to inform you that with effect from December 11, 2019, the PricewaterhouseCoopers partnership was converted to PricewaterhouseCoopers LLP, a limited liability partnership under the Limited Liability Partnerships ACT, 2011,” the consultancy firm said in a notice.

“Pursuant to the Act, the business, assets, interests, rights, privileges, liabilities and obligations of the PricewaterhouseCoopers partnership are now taken over by and vest in PricewaterhouseCoopers LLP from the effective date of December 11, 2019.”

An LLP limits claims to the assets of the business. Under an ordinary partnership, there is no limit and individual partners can be pursued to cover claims surpassing the assets of the business. Before the law was changed to allow the creation of LLPs in Kenya, the audit firms relied heavily on professional indemnity insurance to protect them in case they were sued for fraud or other malpractice by any of their partners or employees.

The use of insurance covers will still continue despite the protection afforded by LLP structures, analysts say. Despite various scandals including abetting of fraud, accounting firms in Kenya have not faced major fines.

They are, however, preparing for increased litigations in line with global trends.

“The shift to LLPs is a global trend that is now entrenched in the US and Europe. The main advantage of LLPs is that it limits liability for partners,” a senior partner at one of the audit firms told the Business Daily.

Most of the big fines against the major audit firms have been handed down by the United States’ Securities and Exchange Commission (SEC).

The agency fined KPMG $50 million (Sh5 billion) in June for using stolen data and cheating on training examinations.

It also fined PwC $7.9 million (Sh790 million) in September for violating auditor independence rules when inspecting the books of regulated companies.