Accounting Firms Must Watch Their Ps and Qs
Accounting firms are finding the going tricky in a business landscape heavily pocked with liability land mines, as separate incidents this week show.
A Los Angeles Superior Court jury this week ordered Ernst & Young and two former accountants to pay $14.2 million to a Paramount-based aircraft parts manufacturer in a fraud and malpractice suit dating to 1989. The punitive damages portion of the trial is scheduled to begin June 13.
Meanwhile, experts say it is still too early to determine whether another Big Six accounting firm, Deloitte & Touche, is vulnerable in lawsuits being filed by irate shareholders against IDB Communications Group, a high-flying Culver City company that Deloitte recently dumped as a client.
In the aftermath of the savings and loan industry debacle, accountants and other professionals have become frequent--and sometimes lucrative--targets in liability cases.
Indeed, the Big Six firms--which also include Arthur Andersen, Coopers & Lybrand, KPMG Peat Marwick and Price Waterhouse--said Friday they spent more than $1 billion on legal bills in 1993.
The accounting firms contend they have been unfairly targeted by plaintiffs who bring frivolous or weak suits against auditors, hoping that the threat of protracted litigation will prompt an offer of settlement.
Their advisers, meanwhile, have put them on notice to exercise extreme caution in accepting clients and their potentially questionable practices.
But accounting firms are just beginning to heed that advice, said Arthur Bowman, publisher of Bowman’s Accounting Report. “As short as a year or so ago,” he said, “I thought they were just giving it lip service. But some of the recent activity appears to show that accounting firms are investigating (clients) more closely.”
Deloitte dropped IDB, apparently over disagreements involving revenue and income statements--one of a handful of instances in recent months in which accounting firms have pulled away from clients over what appear to be relatively moderate disputes. Other companies from which outside auditors have resigned include FastComm Communications Corp. of Sterling, Va., and Cambridge Biotech Corp. of Worcester, Mass.
“It’s risk management,” Bowman said. “These firms have really got to take a good look at these clients, to decide if it’s worth the $100,000 to $500,000” they may earn in an audit to “risk maybe a $2-million exposure from irate shareholders.”
The $14.2-million jury award came Thursday. Mattco Forge of Paramount alleged that malpractice by the Arthur Young accounting firm led to the dismissal of an earlier lawsuit it had brought against General Electric. Ernst & Young inherited the dispute when it was formed in the 1989 merger of Arthur Young and Ernst & Whinney. In March, the same jury found that the accounting firm had committed fraud and malpractice in the case.
A spokesman for Ernst & Young said the firm will have no comment until the punitive damages portion of the case has been resolved. Attorneys for Mattco expect an appeal; Ernst & Young has brought four of the five appeals that have already marked the lawsuit’s journey through the courts.
