Audit Firms' Litigation Woes Mount, Report Shows
As reflected in a recently released and detailed analysis of audit firms’ current litigation and prior lawsuit settlements, the audit firs’ litigation challenges are a serious and growing problem. The July 2009 presentation by Mark Cheffers, the CEO of Audit Analytics, is entitled "Accounting Professional Liability: Scorecards and Commentary" and can be found here. According to a July 22, 2009 Compliance Week article (here), Cheffers presented the slides at a recent litigation conference cosponsored by the American Bar Association and the American Law Institute.
The presentation materials reflect very detailed information about the major accounting firms’ litigation. Among other things, the presentation aggregates the top 50 accounting malpractice settlements since 1999. The data show that Ernst & Young has paid the largest amount in malpractice settlements during that period, totaling $1.92 billion. KPMG follows with settlements totaling $1.42 billion, followed by PricewaterhouseCoopers at $1.27 billion and Delotte & Touche at $1.25 billion.
As detailed in the presentation, the audit firms now face huge potential exposure from the growing numbers of lawsuits that have been filed against them in connection with the credit crisis and the Madoff scandal. Cheffers’ presentation lists the current litigation scorecard of cases that have been filed against the audit firms. According to the Compliance Week article, Cheffers said at the conference that these lawsuits filed so far are "likely just the beginning."
The presentation also shows the prevalence of going concern audit opinions, both in terms of percentage of all audit opinions and in absolute numerical terms. The presentation shows that in 2008 going concern opinions, both in percentage terms and in absolute numbers were at their highest level in the past decade
There may well be other places where this kind of information about audit firm liability exposure has previously been compiled, but this is the first time I have seen the information presented this comprehensively. The information presented in the slides is fascinating and one can only hope that Cheffers will continue to update the information and continue to make it publicly available.
Great addition to the information that those of us without the same access to the firms have tried to put together. And great validation to what I've been saying for a while regarding the existing and potential litigation exposure. Between this information and more continuous updates like what was done for the Treasury a while back (but broken down by firm), maybe we can actually piece together what each firm's exposure is and reserves should be and be able to adequately vet their claims of poverty and the need for liability caps. BTW, what was the theory you think of having the Deloitte Deputy CEO participate in the presentation? Seems odd.