In preparation for something else, I attempted to do a quick summary of the pending litigation against the Big 4.
It’s not easy.
Each firm, of course, has a list and their estimate of exposure. (Think they’re following FAS 5
?) And they’re not telling. And no one is making them do so. Even while still babbling on about liability caps.
Kevin LaCroix at D & O Diary does the famous job of making all the lists, compiling from all sources including Stanford’s Securities Class Action Clearinghouse. There are others who report and discuss litigation and sometimes mention the auditors such as Bruce Carton at Securities Docket, Paul Karlsgodt at the Class Action Law Blog and J. Robert Brown at Race To The Bottom.
I’m getting questions every day now, via email and in comments on the blog, about whether to stay at one of the Big 4 given the realistic potential for one to fail within the next year to eighteen months. The issues are more acute at the next tier three
, Grant Thornton, BDO Seidman and RSM McGladrey. Between Refco
, Banco Espiritu Santo, and Madoff exposure for all three, they may be on their last legs.
The question is: Which one first? I bet BDO , whose BDO International
goes on trial for their part in the BES fraud in about a week.
I had never told anyone not to join a firm until last week. I may tell someone to join a different firm or to be sure that joining a Big 4 firm is really “the fulfillment of my lifelong dreams, the best way to realize my talents, and the only way to please my parents.”
In the most recent case, I agreed wholeheartedly with a mature professional who was offered an opportunity to rejoin a Big 4 firm as a partner. He has a great position in industry that is relatively secure. There is no way in hell I would go into the partnership, given the investment required, the tangible risks that are out there,
and the particular issues the firm he would rejoin has. Thank God I was not helping him decide whether to accept partnership as a Senior Manager in same firm. That’s a tough one and right now would have to come down to personal finances and a spouse’s tolerance for great risk and ongoing uncertainty.
The exposure and the control over what happens to a firm as a result of litigation increases as your level and years in the firm increase. At the beginning of your career, you are fungible. A few years of experience is the same all the way around and a valuable thing. Getting cut after at least one year and before five-six, or pre-manager, is not the worst thing in the world for most.
Except for those on work visas and those whose mobility is limited due to mortgages and family issues, young professionals have an opportunity to look at other smaller, regional firms who appreciate the training they have received or to go into industry. Many of both are still hiring.
Some even hire visa holders. But you must either act fast or decide to do something else productive during your time off
, such as returning to school or obtaining professional certifications.
Once you reach the manager level, you have both the constraints of your level/salary and, potentially, personal constraints that start limiting your choices and the number of jobs open in any particular geographic location. You may have an industry expertise. That’s good and bad as it makes you less fungible and more readily identified to that industry, an advantage or disadvantage depending on the economic realty at the time.
As a Senior Manager or Partner, you most likely have both personal and professional constraints.
I don’t need to tell you that. You may have been at the level to have had a hint of the cuts coming, and you may have received a healthier severance, outplacement assistance, and overall strong support from your network, in and out of the firm. But the numbers of jobs at your level and meeting your criteria are limited.
So let’s look at the litigation risks that threaten the viability of the firms while you’re still there or that threaten the firms you may consider switching to or may consider staying with and continuing to invest in.
The Center For Audit Quality
, the lobbying organization for the six largest firms, gave the US Treasury some data in April of last year, on a total basis, not broken down by firm or with specific cases named for those firms:
(This info is pre-summer/fall financial meltdown, pre-Madoff, and pre-Satyam.)
6 largest auditing firms are defendants in 90 private actions with damage claims in excess of $100 million.
41 cases seek damages in excess of $500 million
27 cases seek damages in excess of $1 billion
7 cases seek damages over $10 billion.
Notable suits that have lingered with multiple settlements and actions for firms: Deloitte/Parmalat and Grant Thornton/Refco.
Subprime. There are a number of suits, but it’s hard to find them as the auditor is not a primary defendant in many cases and some of the tracking sites don’t mention them or file them by auditor name as a cross reference.
Some of the major ones I have posted about are:
And now there’s Satyam suits
against PricewaterhouseCooppers LLP US (due to the US ADR’s listed on the NYSE) , Pricewaterhouse & Associates LTD India, and PricewaterhouseCoopers International.
And finally the Madoff scandal
. P.S. Given the relative success so far of at least going to trial on the basis of some liability potentially attributable to the international arms of each of the firms in the BDO International and Deloitte/Parmalat
cases, why aren’t plaintiff’s lawyers routinely suing the international firms in all instances. In particular in Madoff, one easily could claim lack of quality standards and lack of supervision and control of the affiliate by the international firm. Just a thought. Let me help you… (Hat tip to one of my new journalist buddies.)
>Ascot Partners, L.P.; J. Ezra Merkin; BDO Seidman/New York Law School on behalf investors of Ascot limited partnership interests
>Gabriel Capital, L.P.; J. Ezra Merkin; BDO Seidman
/ Scott Berrie on behalf of all persons who invested in Gabriel limited partnership interests
>Tremont Group Holdings; Oppenheimer Acquisition Corporation; Massachusetts Mutual Life Insurance Company; Ernst & Young LLP/Yvette Finkelstein, on behalf of capital investors in American Masters Broad Prime Market Fund, L.P.
>Tremont Market Neutral Fund L.P.; Tremont Group Holdings, Inc. Ernst & Young LLP/Group Defined Pension Plan & Trust
>Herald USA Fund; Herald Luxemburg Fund; Primeo Select Fund; Medici Bank; Sonja Kohn; Perter Schelhauer; Bank Austria Creditanstait; Unicredit S.A.; Pioneer Alternative Management; Ernst & Young L.P./Repex Ventures on behalf of all persons who invested in Herald USA Fund Herald Luxemburg Fund; and Primeo Select Fund and Thema International Funds
>Banco Santander S.A.; Banco Santander International; Optimal Investment Services S.A.; Pricewaterhouse Coopers
; HSBC Securities Services (Ireland) Ltd.; individual directors and offices of Optimal Investment and Optimal Fund/Inversiones Mar Ocava Limitada on behalf of all personswho owned shares of Optimal Strategic US Equity Ltd
>Banco Santander S.A.; Banco Santander International; Optimal Investment Services S.A.; PricewaterhouseCoopers; HSBC Securities Services (Ireland) Ltd.; HSBC Institutional Trust Services (Ireland) Ltd.; HSBC Bank USA, N.A.; individual directors and officers/ Serol Holding Corporation on behalf of all persons or entities who owned hsares of Optimal Strategic U.S. Equity Ltd. on December 10, 2008