The “Last Out” May Come From Left Field…By Francine • Jul 13th, 2009 • Category: Latest, Pure Content, The Case Against The Auditors
Alan Dershowitz: A priest? Well, a priest is the ideal witness: it’s like getting the word of God.
Claus von Bülow: I checked. God is unavailable.
Claus von Bülow: Well, before you assume I’m guilty, won’t you hear my story?
Alan Dershowitz: No. Never let defendants explain; puts most of them in an awkward position.
Claus von Bülow: How do you mean?
Alan Dershowitz: Lying.
It seems so much of the time I spend on the blog – reviewing material, discussing the firms with others, analyzing the strategic choices they’ve made – is spent on lawyers and litigation. Jim Peterson wrote a follow-up post yesterday with his thoughts on the Mid Year Review of Securities Litigation and SEC Enforcement webcast and our phone conversation over the weekend.
We agreed at least on this: Failure of another big audit firm is the elephant in the room. In fact, I’m seeing a few journalists, once bold, who are now afraid to touch the topic. The mantra, reinforced by the Center for Audit Quality, the standard bearers who seem to be on every advisory panel, and the firms’ lawyers, goes something like this:
“Speaking the unspeakable can precipitate what does not have to be necessary. Let us not even whisper these thoughts, let them cross our lips, for fear of sparking a crisis of confidence in the firms and therefore in our robust capitalist system. In fact, let us protect the integrity of our valuable public company auditing process by implementing liability caps, safe harbors, and new legislation which liberalizes the competitiveness crushing parts of Sarbanes-Oxley such as scope of service restrictions, independence requirements, audit partner rotation, and conflicts of interest so our clients have the choice to continue to pay us billions of dollars for the things which, of late, have not done anyone any good in warning, mitigating, or addressing the extreme crisis we already have.”
Ok. Sorry. I could not help myself but add in the last part. I was in a zone…
The funny thing is that I can spend all day, all night, weekends reading and writing about cases like BES v. BDO International, Deloitte International and Parmalat, New Century Trustees v. KPMG International and Satyam and PwC and none of those may be the match that burns down the house. It may be something out of left field…
A new subprime suit? Everyone agreed on the webcast that the pipeline was filling and we’re bound to see more suits that include the auditors as defendants. But the pace, so far, is slow due to the sheer numbers and the increased difficulty under PSLRA of bringing them.
A Madoff suit? They keep on coming and there are now forty-three suits that name Big 6 firms. According to Kevin La Croix, who tracks them dutifully, the filings are coming at an intimidating pace. I saw that many of them now include the international firm of the audit firms as well as the primary service member firm for good measure. My edited summary of Kevin’s list is here.
A “going concern” suit? In January during our inaugural webcast I said:
One Bold Prediction for 2009: Credit/financial crisis suits will finally use the absence of “going concern” opinions prior to big failures to push at least one Big 4 firm to brink of failure.
I may have been ahead of the times, which I am often. But I still think, like the subprime suits, that these lawsuits can, should, and will be filed in great numbers, specifically against the auditors for:
- Aiding and abetting the fraud committed by management to prolong life support (and increase indebtedness resulting in a much weaker financial position, bailouts and diminution existing shareholders/debt holders interests,)
- in service to ongoing incentive compensation including more backdated stock options,
- as well as gross negligence in not applying the applicable standards related to the “going concern” opinion.
Audit Analytics says that more “going concern” opinions were filed in 2007 and that the pace was set to exceed that in 2008 than in the last ten years. Worried a bit? Some might say the auditors are catching up. And I would agree. The problem is most of the big financial services firms that failed or have been bailed out have been teetering for a while and the ones that are still going are still a big problem.
GM, BearingPoint, Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, GE, Fannie Mae, Freddie Mac…
Be my guest.
Photo of Jeremy Irons courtesy of this site.
Photo of Scott Podsednik, Chicago White Sox left fielder courtesy of this site.