The 21-member panel sitting on the U.S. Treasury’s Advisory Committee of the Auditing Profession met last week to discuss and review the issue of limited liability for auditors. The Committee meeting followed an earlier meeting in Washington, DC this summer in which it was advised that the six largest auditing firms had 27 separate outstanding litigation matters against them with damages exposure exceeding $1 billion, and that seven of these matters had potential exposure exceeding $10 billion, according to an article in Accounting Web. The article states that it is impossible to buy insurance to cover such catastrophic liability and that any one of these cases could be fatal to an auditing firm.
Lynn Turner
Despite the huge exposure, Committee members such as Lynn Turner, formerly chief accountant to the SEC, were not persuaded that limited liability is the answer:
“Do you believe that an auditor found to have been aware of financial reporting problems but never reporting them to the public should be the subject of liability caps or some type of litigation reform protecting them?” he asked.
According to Accounting Web, recent and outstanding claims against the biggest six firms include:
- BDO Seidman — last August a jury ordered BDO Seiman to pay $521m in damages for its negligence in a Portuguese bank audit, almost as much as the firm’s estimated revenue for that year.
- KPMG — A US Justice Department report concluded that KPMG either helped perpetrate the fraud at New Century or deliberately ignored it. Class action lawsuits are also pending. KPMG also faces a lawsuit by Fannie Mae, which is trying to reclaim more than $2 billion from its old auditors. KPMG already paid $400 million to settle the SEC’s case against it related to Fannie Mae.
- Ernst and Young — will likely face lawsuits related to the bankruptcy of its audit client, Lehman Brothers.
- PwC — lawsuits are likely for its audit of what was once the world’s largest insurance company, AIG.
