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 brilliant professor of law is hired by wealthy socialite Claus von Bulow to attempt to overturn his two convictions for attempted murder of his extremely wealthy wife…

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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10 Responses »

  1. Here’s my “left field nominee”, PWC at AIG! AIG was a Goldman counterparty. Goldman is audited by PWC. PWC saw both sides of all CDSs between AIG and Goldman. AIG’s CDSs were woefully overvalued. AIG got $173 billion in bailout money of which $13 billion went to Goldman. Are we to believe PWC is so stupid it couldn’t see the CDSs were a zero-sum game? Even I don’t think PWC is that stupid. Will it happen? Stay tuned? Satyam, though a disaster is a fly on an elephant’s back compared to the AIG disaster. I await other nominees.

  2. I don’t think any of the firms will fail or are close to failing. One should remember that Anderson might very well have survived Enron and Worldcom if it were not for the criminal prosecution (which the government would never repeat). These firms are resilient and it is rarely in the plaintiffs interest to destroy the defendant. They want them alive to earn money for structured settlements. AIG is a very unlikely candidate to create threateningly large liabilities since the SEC has found no need to restate any of their financial statements.

    The bigger issue is business model and what the global regulators will do with the auditing profession.

  3. TF:
    That the SEC did or did not do anything, means nothing to me. If the plaintiffs’ bar decides to take the entire AIG-GSG fiasco apart, it could be the biggest disaster in CPA history. The SEC has no credibility anymore. What did it do for ten years with Madoff? Nothing.

  4. The litigation will take years and millions of dollars in legal fees. TF brings up a good point, a lot will end up in structured settlements, regardless of who really was at fault. However, I think the firms are going to fight most of these tooth and nail.

    My bet is BDO is going to fail or be severly impacted. The firm will either die or be a shell of its former self.

  5. [...] it weren’t bad enough to have so many subprime lawsuits hanging over their head, the Big 4 – well everyone but Deloitte for some very odd reason – also [...]

  6. [...] independence issues recently and was supended from taking on new audit clients for six months.  How many strikes does a firm get?  Why no strong statement, sanction or other disciplinary action from the PCAOB [...]

  7. [...] confusing to me is that the Private Securities Litigation and Reform Act (PSLRA) restored the SEC's ability to use "aiding and abetting" as a tool for enforcement of the securities [...]

  8. [...] last out for the audit firms could come from almost [...]

  9. [...] when the external auditor performs work to support an audit in multiple global locations. The last out for the audit firms could come from almost [...]

  10. [...] The loss of a major network member firm from regulatory or legal actions  - Japan, Russia, Germany, the UK, India, Ireland, and soon China  - would mean the end of these networks as we know it. But will local regulatory and political forces allow it?  This is the closest we’ve come to regulators shutting down a foreign audit firm and, yet, the firm was allowed to essentially start over with generous help from the rest of the PwC global network. As serious as these sanctions are against PW India – and they will be costly – this decision essentially allows history to keep repeating itself, over and over, audit failure after audit failure. [...]

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