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
"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
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
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
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. …