Litigation Support Liability - the Mattco Decision

Article excerpt

The Mattco Forge v. Ernst & Young case has opened a potentially significant new area of professional liability. Before this case, large judgments against the accounting profession were primarily in auditor malpractice cases. In June 14, however, a Los Angeles jury awarded a $42 million judgment against Ernst & Young for litigation support negligence and fraud.

This is the first successful case commenced against a major public accounting firm for litigation support negligence and fraud; thus the case is important. It is also a potential precedent for limits on expert witness immunity. This case raises liability concerns for any accountant who acts as an expert witness in a lawsuit.

Litigation Support

In an effort to diversify, expand services, and increase revenues, public accounting firms have moved into a myriad of advisory services. One of these rapidly growing services is litigation support. This specialty can encompass a variety of services including investigation of claims, calculation of damages, interpretation of financial information, assistance in trial preparation, and expert witness testimony in court. These support services have been offered by accounting and consulting firms of all sizes, including many individual practitioners. Common areas where attorneys seek litigation support from accountants include marital dissolution, business valuation, commercial damages, lawsuits against other accountants, bankruptcy proceedings, forensic accounting cases, and tax-related litigation.

Professional standards offer limited guidance for CPAs engaged in litigation sup port services. The basic principles of the AICPA Code of Conduct including integrity, objectivity, due professional care, and acting in the public interest apply to any professional service a CPA offers and serve as guide for litigation support services. In addition, litigation services are included in the broad definition of consulting services under the AICPA Management Services Division's 1991 Statement on Standards for Consulting Services. This Statement identifies standards under Rule 201 of the Code of Conduct as applicable, including professional competence, due professional care, planning and supervision, and sufficient relevant data. Three additional standards under Rule 202 identified specifically for consulting services are client interest, understanding the client, and communication with the client.

A client naturally expects effective advice and assistance when it engages a CPA as an expert witness. Unsuccessful litigation may result in the client questioning the effectiveness of the litigation support services received. The Mattco Forge case is a stunning example of what can go wrong when a CPA provides litigation support services.

Mattco Forge v. Arthur Young

A California jury decision against the accounting firm of Ernst & Young (formerly Arthur Young) held the accounting firm liable on two counts of fraud arising from litigation support rendered on behalf of a manufacturing company. The jury awarded $14.2 million in compensatory damages and $27.8 million in punitive damages in June 1994. The jury also found a former managing partner liable for $250,000 and a former employee liable for $5,000. The case is currently being appealed by the accounting firm

The size of this judgment and the serious implications of the finding of fraud warrant a close look at the facts surrounding this case.

In the mid 1980s, Mattco Forge, a California small aircraft part manufacturer, commenced a lawsuit against General Electric (GE) alleging wrongful discrimination against the company in the awarding of GE contracts. To prepare for trial and at the urging of one of the accounting firm's managing partners, Mattco retained the public accounting firm of Arthur Young for litigation support. Mattco alleged that one of the reasons they retained the accounting firm was its advertisement that stated the was an expert in litigation support and could "assist attorneys and clients having a real or apparent lack of data. …