Globalisation and the threat of
vicarious liability are driving some accountancy groups to
reconsider their international structural model. Experts from
networks and associations debate the pros and cons of their
structural strategies, the legal implications and what the future
may hold.

Round table

Over the past few years, global
mid-tier accountancy groups have been monitoring the debate over
whether to position their organisations as closely integrated
networks or much looser associations of independent firms.

The implications of both models are
significant. Networks are perceived to offer a more seamless and
consistent cross-border audit service but run a higher risk of
vicarious liability – the spread of liability to a third party,
often a global administration body that is deemed to have control
or the ability to control the violator’s actions.

Associations offer firms in different
countries independence and lower vicarious liability risk but can
be viewed as providing a less consistent service, which is
important when pitching for some multinational companies.

Although most associations and networks have a
clear definition strategy, there are some that are either fence
sitting or have different models in different jurisdictions.

As the incidence of vicarious liability suits
increases, The Accountant held a round table debate on the network
definition debate with a panel of experts from networks and
associations in London on 28 January 2010. The aim of the
discussion was to bust some of the myths that surround the debate,
as well as get a better understanding of both models and their

The discussion begins with a short synopsis on
the network definition issue by Institute of Chartered Accountants
of England and Wales (ICAEW) head of integrity and market Tony
Bromell. The ICAEW recently produced a report for the Federation of
European Accountants (Fédération des Experts Comptables Européens –
FEE) on the definition of networks in an Tony Bromell, ICAEWEU context.

Synopsis by Tony Bromell: I
am here to mention some work we did with FEE, which is the European
Federation of Accountants. They published something two years ago
called Transnational Organisations and Practices within the
Accountancy Profession – Euro-speak for networks and associations.
The rationale behind it was that the European Commission is talking
about a single market but we don’t have very many single market
European audit firms, so we looked at how firms were made up. The
clear message was that it was very fragmented, largely driven by
legal and cultural differences, such as different liability and tax

The most common structure appeared to be a
network actually comprising a series of smaller individual national
firms with a separate firm co-ordinating the whole. There were a
small number of genuine pan-European firms but that has expanded
with the Big Four in the last couple of years. There were an even
smaller number of traditional business type international firms
with a main partnership, having subsidiaries working in different
places. So why is there no greater movement? It is all down to the
legal and cultural differences.

The EU market wants gradual harmonisation but
it will be a very long time before we have identical or near
identical legal regimes. One reasonably positive aspect was an
update on network firm definitions. Some years ago, the
International Federation of Accountants (IFAC) ethics standards
board agreed to adopt an identical network definition to that of
the EU Commission. This is now in the EU’s Eighth Directive, so
people are starting from the position where the two main drivers
have the same definition.

Looking across countries, they were not
identical but they were gradually moving in that direction. If you
look at, for example, the UK Audit Practice Board’s definition, it
doesn’t use quite the same wording. Effectively, though, it means
the same thing. The only real guidance on all this is a few
paragraphs on in the IFAC Code itself, about two pages worth that
says this is meant to be a principles-based definition, with all
the rights and wrongs that brings.

What it comes down to is if you operate as one
entity or nearly as one, or appear to operate as one, then you
should be treated as a network. If you can exert significant
influence, which is less than control but more than a
recommendation, then you are a network. It is what the Americans
call the duck test – if it quacks like a duck, walks like a duck
and looks like a duck, it is a duck, regardless of its precise
legal form. Clearly, that does require judgement and it causes some
issues. Some of the very large firms are networks, no questions
asked. Some of the looser cross-referral associations are clearly
just that: associations. However, there are a number in the middle
which could go either way.

There are consequences in terms of potential
liability, I don’t think any claims have succeeded yet in making
one part of a network liable for another part with a separate legal
identity. However, lawyers will keep trying. Other relevant issues
include independence rules, transparency requirements on disclosure
and audit registration transparency. So, it does matter.

Jon Lisby, Kreston
International, executive director:
The bigger point, which
is a slight challenge, is that it is not actually Kreston that
decides if it is a network or an assoJon Lisby, Kreston Internationalciation, it is the
regulator who decides.

So even though we have a single definition
globally, if you take Europe, there are 25 to 27 regulators and the
regulator in Germany will form different views from those in France
and the UK. So, while James says ‘I am an association’, he will
find the French regulator will refer to him as a network. He will
treat your member as a network.

James Mendelssohn, MSI Global
Alliance, chief executive:
We have had issues with a small
number of European regulators saying to our member firms, ‘you are
not an association’.

Jon Lisby: And most
regulators, because they are regulators and want to regulate
something, will do what they can to argue that you are not an
association but a network so they can regulate it.

The second issue in your opening remarks, you
mention that ‘I am interested in networks, therefore, I am
interested in litigation’ – as if networks equals risk of

I would argue that almost the same degree of
risk is attracted to an association that carries a directory and
does everything apart from say it is a network. The risks can be
applied to associations as equally as they can to networks.

Nigel Hodges, Nexia
International, executive director:
Our legal advisers say
the same thing about China, America, Germany and England. We have
had leading lawyers in every one of those countries say that there
is no more litigation danger [between a network and

Jon Lisby: The US attorney
will not be put off by the fact that you have said ‘we are an

James Mendelssohn: There is
also the perception of member fiJames Mendelsson, MSI'srms and clients of member firms that there is a

Question to Jon
Kreston International recently made the decision to
move towards a network model. What are the main drivers for this

Jon Lisby: Our key driver,
which we have been debating over the past three or four years, is
how can we compete more successfully in the marketplace of the
branded mid-tier group?

On regular occasions we are up against BDO,
Grant Thornton and RSM. We found that we do not have the
credentials that apply to network firms in terms of globally
co-ordinated quality reviews and greater use of shared branding,
which means you are less likely to win. We are driven by commercial

David Isherwood, BDO UK,
director of audit advisory:
I think professional firms
really designed those structures to fit the client’s needs. If your
clients demand the same audit methodology, quality control
procedures, the same training throughout the world then you
effectively fall into making a network firm structure.

If you are not careful you can talk about the
tail wagging the dog here. You don’t decide to become a network and
then find your clients. What you do is design a business fit for
your purpose. Our clients want consistently high quality products
all the time throughout the world and the way to do that is as a
network firm.

Now the risks and the liabilities need to be
managed, but where we manage those is not deciding if we are a
network or association, it is by doing high quality work all the
time and at the end of the day that is the best way to protect
yourself against any claims.

Jon Lisby: Reading [BDO
International chief executive Jeremy Newman’s] tablets of stone,
BDO are trying to challenge the Big Four and groups like Kreston
want to challenge the BDOs and Grant Thorntons. For us, our reason
for moving to network status is commercially that point.

The marketplace assumes that to handle
international work you should have those processes in place that
apply to networks. It is unlikely an association would be able to
hanArvind Hickman (IAB)dle international work in exactly the same manner.

Question from Arvind Hickman,
International Accounting Bulletin, editor:
this a perception or is this reality?

Jon Lisby: Now we
have made the step, it is a reality.

Nigel Hodges: But
does the client care? I do not think they do. They do not know what
it is, they are not interested. But it may be sold by the media and
others and I think as you were saying if one was up against another
then it could be a marketing message but I do not think it is. If
the client likes you, if you talk sense, they will come to you.

Jon Lisby: I would
agree with that if it is a managed international business. If you
are talking about presenting to an audit committee, the chances of
an association like Kreston competing against BDO is quite slim at
audit committee level.

James Mendelssohn:
I think that is the critical point, you talk about international
and there is a huge range of client situations at international
level. For truly global multinationals, it has to be a network with
international standards. There are also lots of good young smaller
entrepreneurial businesses who want to do a bilateral deal in
another country, which is a totally different kettle of fish, and
that is very important.

If you are a good entrepreneur in
the UK, with a good business and you want to do something overseas
for the first time, you will buy by relationship. In this case, I
think it is easier to buy from the association route because within
a smaller, more personal organisation of firms who know each other,
it is easier to sell a relationship than in a network for firms. It
is just horses for courses.Jean Spephens

Jean Stephens: It’s
the client who dictates ultimately.

Paul Ginman, Baker Tilly
International, COO and technical director
: If I put myself
in the shoes of an audit partner, if I’m introducing my client to
someone overseas, I want them to be looked after to the same
quality and standard as I provide them with.

That is key to the relationship, whether you
are part of a network or an association – the badging is
irrelevant. Ensuring the same quality of service is easier if you
have within your organisational structures that tick boxes on what
the quality of that service will be. That may be a quality
assurance process, international audit methodologies, or
international training programmes and so on.

Question to Jane Howard,
Reynolds Porter
Chamberlain, partner: You
provide legal advice to networks on vicarious liability. What
trends have you noticed in the past year in terms of vicarious
liability and its threat to global organisations?

Jane Howard: The
trend in the current economic climate is that there has been an
increase in the number of claims involving both international
umbrella organisations and other member firms within the same
network as the firm whose work has been called into question.
Plaintiffs are trying to reach through the umbrella organisations
with a view to accessing professional indemnity pots held by other
member firms, whether or not they are actually involved with the
work in issue.

Claims are an inevitable fact of professional
life. Have we seen as much as we would expect? Well, I think that
in line with expectations about increases in domestic litigation
there probably hasn’t been a tsunami of claims. That said, the
number of claims involving international networks has been much
greater in the past two or three years. Prior to that there
waJean Howard, RPCs Parmalat of course, which went on for a number of years
and has only recently settled. As someone who speaks on this topic
on a regular basis, my client list has expanded fairly rapidly in
the last year or so.

We have picked up a lot of advisory work in
the wake of cases such as Banco Espirito Santo vs BDO (where it was
suggested that the constitutional documentation put in place at
network level could provide evidence of control). The Securities
Acts are being well used in the US but have come under greater
scrutiny. There is much debate over whether culpable participation
(or the potential to control) must be shown as the basis for
liability under those statutes.

A few years ago, we felt reasonably
comfortable that evidence of actual control was needed. However,
that and other cases threw that into doubt and everyone was driven
to look more closely at their member firms’ agreements and the
language used in them.

The plaintiff lawyers, inventive as they are,
appeared to have worked through that documentation in the BDO case
picking out certain phrases as evidence of an alleged control
relationship. It became a forensic language exercise.

It was a big relief all round when the jury
took less than an hour at the full trial to decide that BDO
International was not responsible for the work done by its US
member firm.

Sub-prime and the exposure of massive fraud
led to further litigation involving international networks. It is
interesting to see that in the New Century vs KPMG case, the
argument was that since the international body had represented that
it would carry out quality control, the fact that a loss had been
suffered must have meant there had been a failure to supervise the
member in question. In essence, it was said that the umbrella
organisation had promised to police the member firms and, as
something had gone wrong they failed to deliver on that promise.
This was a relatively new and novel way of putting the case against
the global organisation.

Question from Arvind
What are the lessons to learn from these major

Jane Howard: That
they are hard to extract oneself from at the pre-trial stage. This
means that, even where they lack merit (as they so often do), they
can be expensive to defend and reputationally damaging along the

Ultimately, no-one has succeeded in finding
that the umbrella organisation (or another member firm not involved
in the work in question) has been responsible for the work of the
primary auditor. It is therefore rather depressing that the courts
have shown themselves reluctant to throw these cases out at an
early stage.

As the Parmalat case showed, one is often
involved in these cases for the long-haul. That said, it was good
news for networks to see Grant Thornton and Deloitte extract
themselves in a relatively painless way from that
litigation.Nigel Hodges, Nexia

Nigel Hodges:
Probably cheaper than having a lawyer for next five years.

Jane Howard: It was
probably in their irrecoverable costs that they were going to pay
their American attorneys to take it to trial. No one wants to pay
out, but what they did pay out was very small compared to what they
might have done.

Question from Arvind
Is that a bad message to send out to the
profession – that you are better off to settle rather than run the
reputational risks?

Jane Howard: That is
always a difficult judgment call that applies in all litigation. If
you get a good settlement, that is good evidence you have done a
good job on persuading the other side that they were not going to
win otherwise why would the plaintiffs accepted modest terms from a
solvent defendant?

It is always difficult when you have
plaintiffs that are individuals (or represent individuals), such as
pension funds, where there is inevitably some political pressure at
play. Few judges like to leave plaintiffs without a remedy. One
will so often see Judgments carefully crafted to come to a ‘just’
result irrespective of the law.

That said, Judge Lewis Kaplan, who has heard a
lot of these cases before the New York Court, has always woven into
his Judgment some quite disparaging comments about the way the
plaintiffs’ lawyers have put their cases forward.

Nigel Hodges: Jane,
You were talking about the tsunami of litigation and we talk about
that in term of economic cycles – so will there be a litigation

This is the year that companies might really
struggle, if they managed to survive the first cold winter, great,
but the second cold winter might get them. Do you see litigation

Poul Ginman

Jane Howard: Yes, as
you say there is often a litigation lag. It is slower in coming
than during the previous recession. Many organisations may well
feel they have better things to spend money on than litigation.
Where we have seen an upturn is in the area of litigation arising
from failed transactions. Also, recessions tend to uncover fraud,
which is often at the heart of the very largest claims.

I dare say we can expect to see a few more
claims of this sort coming through against networks and

While that litigation is primarily directed
against the primary fraudsters, auditors are not too far down the
hierarchy of potential ‘deep pocket’ defendants.

There are probably a number of cases where
perhaps the auditors are sitting in the wings knowing that if there
is a short fall in what can be recovered from those more obviously
responsible for what has happened, they may be called upon.

Jon Lisby, Carolyn Canham and Angela LynchQuite often, as time
passes, we are approached by lawyers acting for the Claimant
requesting that our clients enter into ‘stand still’ agreements,
effectively stopping time running out for a claim against the
auditors pending the outcome of the primary case being known.

Given the scale of some of this litigation,
this is perhaps inevitable. Auditors are often accused of failing
to spot “red flags” that ought to have alerted them to the problems
at an early stage.

Question from Nicholas Moody,
International Accounting Bulletin, senior
You are talking about an increase in litigation;
can you quantify that in any way?

Jane Howard: The
headline grabbing cases, whilst on the increase, are still not that
numerous. Quite a few have arisen out of Sub-prime, Madoff and
related scandals, but no more than 15 or 20 such claims in the last
couple of years have come onto our radar. No doubt there are others
that don’t hit the headlines Carolyn Canhamas they are not as
sexy/high value.

Question from Carolyn Canham,
The Accountant, editor :
Do you think the results
of BDO case would make plaintiffs less likely to chase the
international administration body? Do you think that put them

Jane Howard:
Plaintiff lawyers are rarely put off but it will send a firm
message to them that it is no longer sufficient to say ‘you were on
the scene’ or ‘you happened to be a member of the same network and,
therefore, you must be vicariously liable for them’.

Hopefully, plaintiffs will be made to work
much harder in the future to produce evidence of actual control if
these cases are to be allowed to continue.

The depressing thing is (as the Parmalat
litigation showed) that it is hard to convince a judge to let you
out of the action at an early stage unless there is absolutely no
evidence of any control or involvement with the audit in

If there is to be a case where a number of
organisations are found liable for the actions of another member
firm, one would like to think that it would be in circumstances
where they went way beyond normal quality control and actually
directed or influenced the work in question.

Quality control, after all, is simply the
organisation’s way of seeking to deliver to the client what had
been offered to it at the outset of the relationship – getting what
it says on the can.

Question to James
You have previously been outspoken on the
legal threat to networks due to vicarious liability, but in the
past year the major lawsuits against networks – Parmalat against
Grant Thornton/Deloitte and Banco Espirito Santo against BDO – have
gone in favour of the networks. Have these rulings changed your
views on the perceived legal threat?

James Mendelssohn:
Obviously, going back some time, the distinction between an
association and a network is that the one benefit of an association
is that it is less cohesive and has less liability, and clearly
those two decisions have eroded that distinction, which we

I think there are plaintiff lawyers who will
join anything that moves and you are still arguably less likely to
be joined as an association as it is more removed. The reputational
damage [due to litigation] is there if it is successful or not.

Everyone knows about Parmalat, who was
involved and it was long before it settled, therefore, the damage
had been done. What is also quite interesting is the number of
firms I talk to who are applying for membership who raise this as a
key issue.

So whether that is a misapprehension, the
firms say they apply to you because you are an association. We are
independent, we do not want to get linked in with dodgy firms in
emerging economies, and for us that is important.

What Jane is saying is that maybe that
distinction is not quite as marked in reality as it is in
perception but it is certainly still in the minds of firms,
particularly in the US where they are very litigation aware.

Jane Howard: James’
point was well made, in that given the ambiguity of different
regulators it is hard to clearly define.

James Vrac UHYJames Mendelssohn: Well, we are very clear that as
an association, in the IFAC definition, it says if you are a group
that includes lawyers then the lawyers are part of the network.
Then, when you are trying to refer work between lawyers and
accountants it underlines your whole rational, so we are clear and
we tell members what they can and can not do, and 98 percent of the
time this works very well.

You then get an email from a country where a
regulator has said to a member firm that you are a network and yet
we are fairly clear that we stick to all the rules and definitions
laid down by IFAC, so it is tempting to say it is not our problem.
But what we have actually got to do is to create the environment
for our members to operate as an association firm.

Although those two cases help the cause, there
is still a nervousness among certain firms. Reputational damage is
huge and it is all very well to say you won the case seven years to
eight years later, but already a huge amount of damage has been

Tony Bromell:
Reputational damage goes with the name of the structure, of course,
and a lot of networks do require a partially common name whereas an
association will not use them.

Jane Howard: Don’t
you come under pressure from some members who say ‘well don’t you
think it would be a good idea commercially to share a name’?

James Mendelssohn:
Absolutely. There are many people who like to be part of a larger
firm in an association rather than a small firm in a network.

I suspect from a commercial point of view,
what most associations are trying to do is to push as far as they
can in terms of promotion and marketing, but still allow you to be
an association.

Of course there is pressure to do more and
more but you have to be careful not to overstep the mark. Our
problem is that we do not know where the mark is because different
regulators in different countries say totally different things even
within the European Union.

Jane Howard: I have
had associations come to me and say ‘what can we do to not be a
network, what do we have to tick’? It is very hard to give them
that assurance.

James Mendelssohn:
will not say it is not our problem, but we are not going
to be hit by the regulators. Nobody regulates associations; the
people who get hit are firms by their local regulator.

Question from Carolyn
What are the implications for individual firms
when, for example, the regulator in Germany says you are a network

James Mendelssohn:
It is a matter for the firm or firms in Germany to demonstrate they
are not a network. They either have to stop doing whatever they are
doing that the local regulator deems as evidence of network
staPoul Ginman, Baker Tillytus or comply with requirements of a network

Paul Ginman: Each
country will be policed by the European Commission on its
implementation of the Eighth Directive, but if you go outside of
the EU any country can have its own network definition.

The IFAC Code is only a
recommendation, it doesn’t have any power. Therefore, you will
always come up against the situation where someone will believe
that because you have a website and a directory you are a

James Mendelssohn:
It is such a grey area. Every case is different and it is dangerous
to put too much weight into an individual case because they are all
so different. Really, if it came to it, the case goes to court and
someone will decide.

You can not say the Parmalat settlement is
good or bad for us because there are so many discrete factors that
in a short newspaper article do not get reported on.

Jean Stephens:
Well, the next case will be different anyway..

Jane Howard: Kaplan
described it as like the Bayeux Tapestry – do not judge it by
looking at a single thread.Angela Lynch, PKF

Question to Angela Lynch, PKF
International, senior manager:
How has the BDO decision
impacted on the structure and operations of your network?

Angela Lynch: I
think to some extent we breathed a short sigh of relief, but I am
not sure it is a long-term relief. We know that litigation will
probably come back, they will find different ways, and it might
only be short-term good news.

I am not sure it has had much of an impact on
the structure of our network.

We put effort into our language of our writing
but that was probably as a result of the preliminary findings not
as a result of the final findings. So there has not been a lot of

Nick Jeffrey, Grant Thornton International,
director of global public policy team: We all still want to do
international work, none of us are preparing to walk away.

It is very inconvenient bordering on
threatening to the livelihood of our partners and member firms but
it is not stopping us at the moment, it might change if a major
firm goes down through one claim, which is not a remote

Round table

Arvind Hickman: Is
that possible?

Jane Howard: It is
theoretically possible.

Nick Jeffrey: One
claim could sink a firm, you are then talking about clients walking
away, it damages your reputation, the partners see what is going on
and it reflects negatively.

Jane Howard: Look
at Enron, it was not a judgement that sank [Arthur Andersen], it
was the clients.

Arvind Hickman: So
the reputational damage that would come from a major lawsuit is
what is going to really destroy a firm.

Question from Nicholas
There was a recent judgement in Hong Kong, which
was a long running case for Ernst & Young, what are your views
on that?

James Mendelssohn:
Not big enough. It was £400 million ($630.6 million), where did I
find that?

Nicholas Moody: The
figures were never disclosed.

Nick Jeffrey: It
wasn’t a number in the public domain, but that is a number that
seems unlikely at first glance that the local firm could finance on
its own.

Coming back to James’ point about regulators,
regulators are national and I agree with that entirely, but there
are increasingly international organisations of regulators both on
the securities side and audit side that are co-operating and they
want to know what is happening at an international level – the
quality control procedures, how the accounting organisations are
safeguarding quality and consistent service throughout the network.
Even the UK regulator is not just interested in the UK, they want
to know about international procedures and about what is happening

Jean Stephens: It
is the same in the US, the same questions.

Paul Ginman: The
regulators are asking the member firms ‘you are part of a network,
explain what that means and how the quality of other network
members’ work is controlled so you can place reliance on the
audit’.David Isherwood

Question to David
A few Big Four firms have moved towards
cross-border integration, such as KPMG in Europe and E&Y. Do
you believe other Big Four and mid-tier networks will move to this

David Isherwood:
There has been some movement in the way they organise themselves
but there is no consistency in the way they have done this.

I think to some extent it comes back to
similar arguments as made in the distinction of networks and
associations. We all set ourselves up in ways to best deliver
quality products to our clients all the time.

If you look at the difference between
associations and networks, a lot of international corporations
demand common practices, common quality control and so on
throughout the world to service their needs and that drives a lot
of firms to become networks.

To a certain extent, I think this is an
extension of that demand – the corporate world is becoming more
international and it is important to them to have people servicing
their needs who control their organisations in a similar way as

To become a network firm you have to agree to
common objectives with your fellow network firms but you don’t have
control. Now, without a doubt our international clients are going
to demand we work more closely with our international firms to
produce more consistency. How we do that will evolve and the Big
Four have moved and devised different structures of their own, so
there is not a single clear model.

The important question is not how I want to be
legally structured, but are we are going to have to work more
closely in the future?

The answer is ‘yes’, but how we get there
isn’t clear. It might depend on how laws and liabilities develop in
Europe and worldwide but it is not clear, so I don’t think there is
currently a model of choice. But I do think we’ll continue to work
a lot more closely with our member firms.

Jane Howard: It is
double-edged on the liability front. It could be used against you
if you are seen to be more co-operative.

It seems to me that the future is about trying
to close the gap between what the client is being promised and what
you are able to deliver, and quality control is the key to

David Isherwood:
Cut through it all, with closer co-operation, if something goes
wrong it affects you in a bigger way throughout your member

But actually with closer
co-operation and more control, you should have less chance of
getting it wrong in the first instance.

Jean Stephens:
Closer co-operation – so you are dealing with bigger clients so
your risk is bigger.

David Isherwood:
Absolutely. Commercially that is the choice we take. It is a
risk-reward choice.

Question from Carolyn
: We heard some suggestion recently that the middle
ground would go away, that you would have one group in a loose
association, others would be closely integrated global entities. Do
you see this happeninicholas Moody (IAB)ng?

Nicholas Moody: It
was Patrick De Cambourg, the Mazars president, who predicted

David Isherwood:
Mazars is a different structure in itself.

Jean Stephens: Over
what time period? Five years, 50 years?

David Isherwood: It
is hard, I don’t have a crystal ball, they obviously see an
advantage in structuring themselves in the way that they do but we
currently don’t see it like that for BDO. Restructuring is not a
means to an end in itself.

Jean Stephens: The
clients do not care, they just care about the service. But where I
do think it makes a difference is when you are in a tender and you
are spending half of that process explaining why you have the
different business card look.

You are spending time assuring them you can
still do it, but ultimately you are wasting time and you lose a
competitive edge. Over time you build a relationship and that goes
away but it is there at the start.

David Isherwood: If your structure
is stopping you delivering your product to the client, then you
would change it. If you can see profit coming from changes then
equally that might drive you to change your structure.

Jane Howard: The
ones that disappear are the ones that have not been able to agree
in which direction they want to go.

James Mendelssohn:
That is good news for clients, isn’t it? What this is doing is
making firms, networks and associations have to carefully think
about what market position they want. As a profession, if we get it
right we can educate clients to make sure they get the right
product and service.

We have lost a couple of member firms who have
gone into networks because of their size, client profile or
location and they need to be in a network. We have gained more
firms who have come out of a network because they value
independence and do not have enough international work to justify
[the cost of] being in a network.

Jane Howard: One of
the upsides from all the litigation is there is greater clarity
about what these organisations are. I think Parmalat is a good
example of firms getting that message out into the press.

Question from Arvind
In terms of clarity, there is a lot of discussion
about the grey areas of the definition: what would you like there
to be – a global definition?

James Mendelssohn:
It is the local interpretation of the definition that for us is the
problem, and that is sometimes driven by political ends rather than
anything else.

Arvind Hickman:
What is the solution?

Paul Ginman: There
are two different issues. Would we like a single set of clear
global standards? Yes, it would make it easier in the way we
operate as we could reflect the global standards in everything we

But does the fact that there are differences
drive the way we structure ourselves? No, because as we have
discussed, the way you operate is driven by what your membership
requires of you.

The fact that there are grey areas in the
definition means some have called themselves associations which can
lead to disagreements with regulators in a specific location.

Likewise, those who say they are part of a
network can get caught out if they fail to comply with the
implications of this.

However, once you have positioned yourself,
the fact that grey areas exist is a headache but it’s accepted that
there will always be grey areas whatever the rules. It doesn’t
matter to us now, we have chosen our camp.

Conclusion by Arvind
: While the network definition may be clear at an
international level, its interpretation varies from jurisdiction to

This is not necessarily a major concern, but
more something that firms have to live with and adapt to.

Perhaps the bigger threat is the cost of
auditor’s liability and reputational damage that could spread
across a network of firms as opposed to an association of
independent firms.

How an increase in litigation and the threat
of vicarious liability pan out in the future is unclear, but so far
it seems the networks have received favourable rulings in high
profile vicarious liability cases such as Parmalat and Banco
Espirito Santo.

This may provide some comfort, but it is
important to note that every case is different and plaintiff
lawyers are always testing new boundaries of the relationship, such
as the potential for network administration bodies to control the
actions of member firms.

Litigation is here to stay and network and
association leaders will continue to follow developments in US
courtrooms with great interest and a hint of anxiety.

Consequently, risk management and quality
control procedures will continue to be increasingly important
aspects of running accountancy organisations for years to come.

Whether a firm chooses to belong to a network
or association is very much driven by client demand. Both models
have their pros and cons and it is a case of horses for

An interesting aside to this debate is whether
networks will move to the full integration of firms into a single
global entity.

A variety of models continues to provide
choice in the market, which can only be a good thing for firms,
networks, associations and clients alike.