Accounting Firms Reorganize to Limit Liability

Ernst & Young, Coopers & Lybrand and Price Waterhouse reorganized their partnerships as of today to give individual partners more protection against lawsuits, the accounting firms said.

The other three Big Six accounting firms--Arthur Andersen, KPMG Peat Marwick and Deloitte & Touche--said they will probably follow suit within a month or so. Andersen’s sister firm, Andersen Consulting, will also reorganize.

Under a form of organization called a limited liability partnership, or LLP, only partners who are directly involved in wrongdoing would have to tap their personal assets to pay judgments. All of the firm’s assets would also be vulnerable, but partners not involved in the case would have their personal assets shielded.

Each of the three firms making the change today will be based for legal purposes in Delaware. The firms will append to their formal names the initials “LLP.”

“The LLP provides some measure of protection for the personal assets of partners not involved in any wrongdoing in the event that catastrophic litigation sends the firm into bankruptcy,” said Peter Horowitz, a spokesman for Price Waterhouse.

“It does not limit the right of aggrieved parties to seek legal redress. But neither does it reduce the threat to the accounting profession’s long-term survival posed by those who abuse.”

The biggest accounting firms have been hit with costly lawsuits, which, because of the way the firms had been of the way the firms had been organized, put their partners’ personal assets at risk.

Some second-tier accounting firms--those that operate nationally or regionally but are not as big as the six biggest firms--will probably take similar action.

Professional service firms have been lobbying for the past several years for the right to organize as LLPs.