Blue-Chip Accounting Firms Face Liability Crisis

Article excerpt

Hearst Newspapers

NEW YORK _ More and more these days, the once-anonymous accountant is becoming uncomfortably visible as the quiet profession comes under widening attack for allegedly slipshod scrutiny of the nation's bookkeeping.

Blue-chip accounting firms are under fire for missing cooked books by insurance companies, banks, real estate firms and pharmaceutical companies.

Take the Big Six firm of Arthur Andersen Co., for example. It was blasted recently by a Senate subcommittee for not uncovering deep-seated financial problems at Empire Blue Cross Blue Shield, the nation's largest nonprofit health insurer.

And there are plenty of problems dogging other Big Six firms _ which besides Andersen include Coopers Lybrand, Deloitte Touche, Ernst Young, KPMG Peat Marwick and Price Waterhouse.

In the last few years, the firms have been targeted in a raft of lawsuits alleging that accountants missed fraudulent bookkeeping at publicly held companies that failed _ and left investors holding the bag.

Analysts such as Howard M. Schilit, author of "Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Statements," say the industry needs to clean up its act.

"There's a liability crisis," he said. "The auditors have to do a better job at detecting financial scams, pure and simple."

The Big Six firms, which audit nine out of every 10 publicly traded U.S. companies, are facing $30 billion in claims from pending lawsuits _ a dramatic jump from just a decade ago.

Critics, arguing that the industry hasn't kept pace with the complexity of today's financial, say accountants have mostly themselves to blame. The firms, however, blame lawyers they say pursue frivolous lawsuits to force settlements with "deep-pocket" accountants.

No matter who's to blame, most see the lawsuits as major trouble for an important U.S. industry with $30.8 billion in business worldwide and 102,442 workers in America alone.

"If one of the major lawsuits is successful, I predict a Big Six firm will fail," said James C. Emerson, editor of Emerson's Professional Services Review, which rates accounting firms.

Here's a rundown of recent woes afflicting the industry: In June, the U.S. Senate Permanent Subcommittee on Investigations blasted Arthur Andersen's $1.9 million, taxpayer-funded report on Empire Blue Cross, which generally endorsed the insurer's accounting. But the Senate panel called the report "fatally flawed" and lacking in "independence."

The lawmakers concluded that Andersen displayed an "absence of professional skepticism" and "an undue reliance upon (Empire's) representations." Responding to the criticism, Andersen officials have stated that their job was to analyze managerial _ not financial _ problems. …