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The “Accounting & Auditing Update” is written by Tammy Whitehouse, a veteran business writer who has been a regular contributor to Compliance Week since 2005. Her work has also appeared in industry journals and periodicals including Journal of Business Strategy, Strategy & Leadership, Compensation & Benefits Review, Inc, Buyside, and myriad others. Whitehouse welcomes questions and comments from readers; she can be reached via email at twhitehouse@complianceweek.com.

 

July 22, 2009

Audit Firms Sure to Face New Litigation, Experts Say

Audit firms have so far managed to fend off any firm-busting liability claims, but research firm Audit Analytics is raising questions about whether that may change in the near future.

Mark Cheffers, CEO of Audit Analytics, says audit firms likely will face some massive liability claims as the plaintiffs’ lawyers determine where to target blame for the economic tumble of the past several months. He presented data raising the question at a recent litigation conference hosted by the American Law Institute and the American Bar Association.

Cheffers said Audit Analytics tallied up cases already making their way into the litigation pipelines, and determined eight major audit firms have been named in nearly a dozen securities class action suits related to the Bernie Madoff scandal alone. Six audit firms have been named in cases related to the credit crisis, and those cases likely are just the beginning, Cheffers said.

Audit Analytics sorted out the top 50 accounting malpractice settlements since 1999 and said Ernst & Young has paid the largest amount in settlements related to those cases at $1.92 billion. KPMG follows with settlements totaling $1.42 billion, followed by PricewaterhouseCoopers at $1.27 billion and Deloitte & Touche at $1.25 billion, the firm said.

“The exposures from existing claims or potential claims is still a breathtaking number,” said Cheffers, but it’s difficult to speculate what may ultimately reach litigation. “The plaintiff’s bar generally understands there’s really only so much you can get from one of these firms before they will fight you to the end of time.”

Audit firms have called for protections from liability, but investor advocates have railed against such measures. Big 4 firms are largely unable to obtain insurance against audit-related liability claims because there are so few firms doing so much of the work related to public companies, and the risk of claims is too great. Big 4 firms worry that a major settlement could bankrupt a firm while investors say the threat of liability is an important stick in assuring rigorous audits.

A U.S. Treasury panel studying the audit profession made a number of recommendations for how to assure the viability of the audit profession, but failed to reach consensus on how to address the liability question. Siefert said the call from audit firms for protection from liability quieted considerably through the financial crisis as Washington became focused on bigger problems.

Roger Siefert, a managing director for consulting firm LECG’s New York office and former general counsel for Deloitte, said there’s been a lull in litigation through the financial crisis, but tension is building. “The plaintiff lawyers are looking for culpable parties and trying to determine if there are deep enough pockets to justify litigation,” he said. “It’s inevitable that accounting firms will be some of the parties still standing, and fingers will be pointing in their direction.”

Posted by: twhitehouse @ 10:07 am

Filed under: Auditor Liability, Treasury Advisory Committee on the Auditing Profession

2 »

  1. See same general opinion and more detail on Bruce Carton’s Securities Docket webcast from July 9th where I discussed auditor litigation.

    http://retheauditors.com/2009/07/mckenna-on-auditor-litigation-securities-dockets-mid-year-update/

    Comment by Francine McKenna — July 22, 2009 @ 1:38 pm

  2. Here is a partial list of securities actions where an auditor is a named defendant.

    http://www.classadvocate.com/?direct=y&category=category&category_level1%5B%5D=17%3A579

    Comment by Class Advocate — July 22, 2009 @ 3:08 pm

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