Auditor Resignations – Lawsuit Anyone?

I’m up early this morning, writing, researching, working on some topics I’ve been meaning to write more about…

It’s a beautiful day in Chicago and the river is shiny. In a little while, the tour boats will come around the bend and under the bridge and more tourists will hear the stories of the amazing buildings lining the shores.

I woke up to the buzz of my blackberry at 7am. There was a message from a reader, an attorney. (I love emails and Comments!)

She asks:

“Are you aware of any lawsuits against auditors alleging that their resignations were wrongful?”

I really couldn’t think of any offhand. The client is usually not unhappy to see an auditor go, since it’s often because of some simmering dispute. It used to be that auditors stayed forever. Their risk averse natures give them an affinity for annuity work over the stop-start revenue of consulting…

There was always next year to work out any differences. Issues rolled over on the management letter from one year to the next and no one pushed to clear them, least of all the auditors who didn’t want to be difficult and jeopardize the paycheck. They were not, in the past, opportunists who would resign because of a better client down the street and there was little to prevent them from managing any conflicts that existed with other clients quietly. Resource constraints were not so much an issue and partners leveraged their time (and the risk of someone else starting to notice that nothing was getting resolved) by putting a new group of young auditors on the job to do the grunt work each year.

Perhaps there was occasionally the situation where something (or someone) was just to difficult to bear. There could be other injured parties if an auditor suddenly resigned and left a client without an audit for the end of the year, therefore putting them in a state of non-compliance with covenants for loans or with the SEC, for example. But in the past, all were usually very understanding and forgiving.

Now with the rise in litigation, especially shareholder derivative suits, auditors are acutely aware of their risks if something starts to go wrong, such as when a company is heading towards bankruptcy. Auditing is now a regulated industry and with the PCAOB watching over them, the firms are running from a bad situation more often now rather than risk becoming a target of the PCAOB/SEC. However, the client names associated with their faults are legally a secret with the PCAOB. Nevertheless, they are starting to “resign” before being fired. They do sometimes wait a fairly long time until they do so, failing to appreciate the conflict they have when shareholders (and management) start to see them as part of the problem instead of part of the solution, such as in Vitesse or Siemens.

I would suspect that a client may sue a smaller firm if the firm resigned over money. But if they’re resigning because the client wasn’t paying them or didn’t want to pay them more, that is not the type of client who is likely to sue them and spend money on lawyers to keep them, no?

So, I am asking my readers:

What’s your experience with a company suing to hold on to their auditor despite revelation of some wrongdoing, for example. Or what happens in the case of an auditor resigning precipitously, leaving the company in the lurch and causing a delisting or non-compliance with loan covenants requiring an audit?

Responses welcome in the Comments or to my email at ReTheAuditors@gmail.com

Thanks!