for the Future
Down to four big firms and fearing the effects of even one major
suit, the audit industry presses for legal relief.
By Carrie Johnson, Staff Writer
Friday, March 9, 2007
The future of the accounting industry may depend on the answer
to a single question: With only four major firms left in the
business, are there too few to let any fail?
Five years after the indictment and collapse of accounting giant
Arthur Andersen, the government remains skittish about how much
to punish audit firms for misdeeds. The firms and their
Washington allies warn that the companies are vulnerable to big
verdicts that could steer them out of business, leaving clients
with few choices, driving up costs, and throwing investors and
markets into disarray.
Even as the industry profits from a spike in accounting fees
after the scandals at Enron and WorldCom, it is launching a bid
to win relief from high-stakes court judgments that insiders say
could spiral one or all of the firms into bankruptcy. To spread
the word, the top firms recently launched a public policy center
and are turning to the Securities and Exchange Commission for
SEC officials are meeting with outside experts to consider ways
to create safe harbors that would shield auditors from legal
liability. Regulators also continue to assess whether to give
their blessing to a strategy that would compel companies to
bring disputes with auditors to an arbitration panel rather than
a jury, according to sources briefed on the issue.
But the issue of how much leeway to grant auditors remains
something of a hot potato just a few years after a series of
corporate blowups devastated investor confidence and tarnished
the reputation of the accounting profession, which failed to
detect widespread fraud.
Debate is raging even as PricewaterhouseCoopers is attempting to
stave off possible charges by Russian authorities over its work
for oil giant Yukos, as Deloitte & Touche last month settled
a claim involving its failed audit of Parmalat for $149 million,
and as KPMG and Ernst & Young continue to battle lawsuits
from clients who bought improper tax shelters.
KPMG narrowly escaped indictment over its marketing of abusive
tax shelters in 2005, agreeing to pay the government $456
million and avoid a possible "death sentence." Ernst remains the
subject of a tax investigation by federal prosecutors in New
The effort to limit auditors' liability has gained traction
within the European Commission, but sentiment remains strong in
certain quarters . When Conrad Hewitt, the SEC's chief
accountant, mused publicly about restricting liability for audit
firms at a conference last month, consumer advocates howled.
Under their view, the threat of liability prompts auditors to do
better work -- and it is the only real leverage that remains,
given prosecutors' reluctance to bring criminal charges against
another accounting firm.
Moreover, Bevis Longstreth, a former securities and exchange
commissioner, said accounting firms -- insular partnerships that
do not release detailed financial information and that govern
and insure themselves -- have failed to make a case that they
cannot afford big legal judgments.
"It's just unacceptable to cap liability and not even look at
profit," said Longstreth, who served during the Reagan
administration. "No one knows what the profits are because there
is no transparency."
In an interview last week, Hewitt said that only Congress could
pass monetary caps on liability for auditors and encouraged the
industry to present a plan to lawmakers. But behind the scenes,
aides to the SEC's general counsel and its chief accountant are
mulling steps that regulators might take to ease the burden on
audit firms, according to sources briefed on the issues who
spoke on condition of anonymity because the process is in its
Many industry officials worry as much about the impact of
regulatory crackdowns on auditors as they do about liability
claims, they said.
As a member of Congress in the mid-1990s, Christopher Cox, now
the SEC chairman, championed a measure that narrowed the ability
of investors to sue in securities class-action cases. Among his
advisers was lawyer Michael J. Halloran, a lawyer who joined the
SEC staff last year as deputy chief of staff and counselor to
The agency is the linchpin in the audit firms' effort because
they think a Democratic Congress is unlikely to carve out
special exemptions for the accounting industry, which has
profited handsomely by charging higher audit fees for intense
reviews of corporate books.
Cox said that the agency was not considering "any specific
proposal" but that staff members were conducting at all times
"intellectual research and development." He added that the SEC
is concerned about limited competition in the industry but said
that the agency will punish wrongdoing wherever it occurs.
Big-ticket lawsuits have captured the concern of broader
deregulatory forces. In a December report, a panel created with
the blessing of Treasury Secretary Henry M. Paulson Jr.
concluded that criminal indictments of companies should be a
"last resort," in light of the Andersen experience. The
Committee on Capital Markets Regulation noted that European
Union officials are considering liability caps and urged U.S.
authorities to do the same. The chief executives of two of the
Big Four accounting firms, Samuel A. DiPiazza Jr. of
PricewaterhouseCoopers and William Parrett of Deloitte, served
on the panel.
Next week, Treasury officials plan to host a day-long roundtable
at Georgetown University where auditor liability will again be
on the agenda. On Wednesday, the U.S. Chamber of Commerce will
issue its own report on the state of regulation. The chamber
report is expected to call for liability changes for accounting
firms, according to people who have been briefed on its
contents. Wednesday will be the fifth anniversary of the
Andersen indictment related to its work for Enron. The
investigation and ultimate indictment induced clients to flee
and pushed the 89-year-old audit firm out of business.
The campaign for relief comes even as the number of lawsuits
against auditors has declined since 2002. In 2005, only nine
cases cited accounting firms. In recent memory, only one big
firm, Laventhal & Horwath, sank because of legal liability.
Laventhal was burdened with court cases in the late 1980s over
its work for clients during the savings-and-loan crisis.
Most of the time, legal experts say, it is difficult for
investors to sue audit firms because the companies that hire
them have primary responsibility for their own financial
reports. Over the years, courts and Congress generally have
forced investors to prove that auditors took part in fraudulent
conduct in order to prevail in court.
For the vast majority of accounting-firm partners, officials who
did not engage in misconduct generally are protected from having
their personal assets seized. Big firm partners earn well into
the six figures, if not more, and typically receive pensions of
about $300,000 a year for life after they retire.
But accounting firms say that the current law isn't enough to
insulate themselves from disaster.
"The issue is not routine litigation but the multibillion-dollar
case that could cause a firm to close its doors," said Robert J.
Kueppers, deputy chief executive of Deloitte, of the auditor
liability discussion, which he said is still in early stages.
"We just don't want to be put out of business."