Treasure Islands - Nicholas Shaxson [125]
Konrad Hummler, the managing partner of an unlimited liability company, Wegelin Private Bank, in Switzerland, explains what it is like to operate under such rules.26
“Partners who have [joint and several] unlimited liability have a solidarity; the dynamic within the group is totally different,” Hummler said. “On so many boards—and I have quite some experience of this—one doesn’t dare to ask the right questions. This [unlimited liability] is the only way of doing business where you dare to ask the really difficult questions—mostly the simplest questions. I will say, ‘Listen, Mr. Chairman, I still don’t understand the case.’ The chairman will say, ‘You obviously haven’t read your papers properly.’ At this point I don’t stop the discussion, but I say again, ‘Mr Chairman I still don’t understand this bloody thing.’ That’s the difference. Because of your unlimited liability, you think twice.”
Joint and several unlimited liability for partners in audit firms is clearly, given their special role in policing modern capitalism, a very good idea.
What was being proposed in Jersey, however, was different again: a law allowing limited liability partnerships (or LLPs.) An LLP for accountancy firms is an example of having your cake and eating it: An LLP partner not only gets the benefits of being in a partnership—less disclosure, lower taxes, and weaker regulation—but it gets the limited liability protection too. And if a partner commits wrongdoing or is negligent, other partners who are not involved aren’t accountable for the consequences. This law was the product of what Professor Prem Sikka, of Essex University, calls auditors’ ultimate aim “to use the state to shield it from the consequences of its own failures.”27 For those involved, it is the best of all worlds. For the rest of society, it is the worst of all worlds.
The draft Jersey LLP Act was worse still. LLPs would not need to have their own accounts audited or even to say on their invoices or letterheads that they were registered in Jersey. It had no provisions for regulating audit firms or investigating misdemeanors, and it offered other audit stakeholders—that is, the public—almost no rights. To get these astonishingly generous concessions from the public at large, these multibillion-dollar global corporations would have to pay a one-time fee of just ten thousand pounds at first, then five thousand pounds a year afterward.
As with the liberalization of usury provisions in Delaware, the Jersey proposal was a delayed reaction to the ideological revolution associated with Ronald Reagan and Margaret Thatcher: a shift away from the view that competitive markets need robust regulation to a childlike faith in self-regulation by market actors.
Big accountancy firms had already gotten LLPs in the United States after first influencing the Texas legislature in 1991; within four years nearly half of U.S. states had it. These limited liability provisions “took away the most powerful incentive for self-policing by the corporate professions of law and accounting,” wrote the tax expert David Cay Johnston, and “help explain the wave of corporate cheating that swept the country.”28 Already there was evidence from the United States that whenever these provisions are introduced, less time is allocated to each audit, and quality suffers. It is nearly impossible to provide a smoking gun in such cases, but these kinds of concessions were undoubtedly important factors in the Enron and WorldCom disasters and in the destruction of Enron’s auditor, Arthur Andersen LLP.
In Britain, following high-profile audit failures such as BCCI, Polly Peck, and many others, auditors had already squeezed major concessions out of the government, having won the right in 1989 to be limited liability companies29—though few audit companies converted, since many did not want to