Newspaper article The Christian Science Monitor

Liability Crisis Threatens Auditors Lawsuits Multiply against Accounting Firms as Regulators Dig into Fraud, Bankruptcy Cases

Newspaper article The Christian Science Monitor

Liability Crisis Threatens Auditors Lawsuits Multiply against Accounting Firms as Regulators Dig into Fraud, Bankruptcy Cases

Article excerpt

THE sedate accounting profession is becoming a risky business.

A series of court decisions this year has put the financial viability of the Big Six accounting firms in jeopardy.

When businesses fail, investors and regulators often find that the company's auditor is the only solvent party remaining. In several recent cases, injured parties have sued the auditor for damages. Recent judgments and settlements include:

* Ernst & Young's historic $400-million settlement with federal regulators for its inadequate audits of four bankrupt thrifts.

* Coopers & Lybrand's $95-million settlement of claims for its allegedly poor audits of the books of MiniScribe Corporation. It reportedly also was ordered to pay $45 million in a separate judgment relating to MiniScribe.

* Standard Chartered Bank won a $338-million judgment against Price Waterhouse because an audit by the accounting firm resulted in a failed investment by Standard Chartered in the United Bank of Arizona.

"Ambulance chasers used to be confined to automobile accidents," says Jon Madonna, chairman of KPMG Peat Marwick, the world's largest accounting firm. "Now ... business accidents are a lot more valuable."

EVEN though an accounting firm might earn only a small fee for an audit, if the business subsequently runs into trouble, the legal rule of "joint-and-several" liability means that a multimillion- or billion-dollar loss can be assessed against each party involved. If everyone else is bankrupt, the auditor may be the only "deep pocket" left standing.

According to the chairmen of the Big Six (Arthur Andersen & Co., Ernst & Young, Deloitte & Touche, Coopers & Lybrand, KPMG Peat Marwick, and Price Waterhouse), litigation and settlement costs increased 18 percent in 1991 over 1990 to 9 percent of revenues. This year will bring a "respectable jump again for us," Mr. Madonna says.

On top of the savings-and-loan failures and problematic investments in start-up companies, well-publicized inventory-fraud schemes have shaken investors' confidence in audits. Recent examples include Phar-Mor Inc. and Comptronix Corporation, where managers claimed to have larger inventories and revenues than they actually had.

Melvyn I. Weiss, a lawyer who has handled lawsuits alleging "accounting and other misstatements issued by publicly traded companies," says these firms have been failing society by not providing "a quality product." Mr. Weiss, of Milberg Weiss Bershad Specthrie & Lerach in New York, says auditors "have to affirmatively take on the responsibility to look for management misconduct." They have to "stand up to their clients when clients resist a proper audit," he adds. "Then we'll have ... what used to be called `certified statements and society will avoid billions and billions of dollars of ruinous losses."

"I hope the accounting firms are waking up," says Walter Schuetze, chief accountant of the Securities and Exchange Commission. "When we see settlements of $400 million, I do not know how much louder the bell has to ring."

Rep. Ron Wyden (D) of Oregon will introduce legislation in the next Congress (it has been introduced numerous times over the last seven years) to require auditors to disclose fraud discovered in the course of doing audits. He thinks the public simply is not aware of the problem. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.