The Enron scandal has highlighted the dangers in using the same firm for auditing and consulting. Insurers, fearing similar crises, are reviewing their use of accountants, but the good news is that professional indemnity rates are rising. Jason Woolfe reports

With senior Andersen executives facing a grilling by US politicians over their role in the Enron affair, it is hardly surprising to hear of changes in the auditing world.

It has long been established practice among accountancy firms to offer companies consultancy alongside auditing.

Some companies already have rules in place to cut the risk of a conflict of interest in accountancy firms arising from breaches in the so-called chinese walls - the imaginary division between the audit and consultancy departments .

One example is AXA. Its auditor is PricewaterhouseCoopers (PwC), although it uses Deloitte & Touche in Asia. PwC has recognised the problem of the dual role and had tried to sell its consulting arm to US firm Hewlett-Packard in November 2000. This ended in failure. Now the firm has announced plans to float the division in the spring.

Ernst & Young sold its consulting arm in 2000, while KPMG is rumoured to be considering a similar divestment.

A spokesman for AXA said: "It's an area we've been looking at, not just for the past few weeks or months, but years.

"One of the things we looked at was how appropriate it is to have the same organisation doing the auditing and providing advice."

AXA brought in a rule that for any contracts of significant value, no more than 20% of the auditing fee should be earned by giving advice. Approval must also be given first by headquarters in Paris.

A spokesman said: "It's possible to combine the two functions, but we're absolutely confident these limits would prevent any conflict of interest."

So, do insurers need to reexamine how they use auditors and management consultants?

Truly independent
The Financial Services Authority's managing director responsible for insurance, John Tiner, told Insurance Times: "There are now rules whereby companies have to prove that their auditors are truly independent. If we feel the company did have too close a relationship with its auditors, or say they had a massive amount of consulting interests with that firm we might ask another firm to go and do it."

Tiner said his concerns applied not just to auditors but also to other professionals such as actuaries or IT specialists working on internet projects.

He said: "The important thing is that we use our powers in a sensible, proportionate and cost-effective way.

"We are not going to do things just for the sake of doing it. It comes back to assessment of risk."

Congressional investigators looking into the collapse of the US energy giant are examining Andersen's role and whether it offered improper advice about Enron's private partnerships.This has the knock-on effect of highlighting the use of off balance sheet companies to hide funds.

It is already known that Aon was linked to LJM2, one of Enron's off-balance sheet partnerships. Amid growing concerns that these off-balance sheet vehicles could have been used to hide Enron's massive debts, this is already attracting attention.

But there may be ways that insurers can profit from the fall-out of the Enron scandal.

Rates for all types of professional indemnity (PI) cover are already soaring.

Accountants are likely to become increasingly aware of the need for PI cover because, as partners in a firm, they lack the protection of a limited liability company.

This applies equally to small firms and big name liquidators such as Dan Schwarzmann of PwC, the man who stepped in to run the failed Independent Insurance.

A spokeswoman for PwC said: "When a partner, say Dan Schwarzmann, goes into a company to oversee the auditing or liquidation, he enters that company as an individual. If a legal case were to arise and he found himself in court, he is going in to represent Dan Schwarzmann, not PwC."

Not only has the insurance market's capacity for PI risks shrunk over the past 12 months, the Enron and Andersen affair is prompting underwriters to scrutinise the work of accountants offering consultancy advice.

Ian McCallum, director of financial and professional lines for Marsh's northern operations, said: "It's not rocket science to see that underwriters are going to be looking particularly carefully at these firms.

"Insurers can almost charge what they want now. Rises of 50% to 60% in the PI market over the next 12 months would not be surprising."

He said financial institutions were already seeing minimum rate increases of 35% to 45% for claim-free risks.

"Insurers have gone back to underwriting. It applies to accountants as much as anyone else, but the insurers are looking at the actual work being done, which wasn't a high priority in the past."

He said insurers were being particularly choosy about risks from accountants doing a lot of insolvency or taxation work.

"We run a scheme for accountants and we've seen an average rate rise of 10% to 20% across the board recently. This applies as much to architects and other professionals as accountants, but the insurers can afford to chuck out the risks they don't want."