Auditor Litigation: How To Track It

Keeping track of litigation against the audit firms is probably one of the most difficult and most time consuming aspects of what I do.  But it has definitely been one of the most intellectually satisfying activities.  I never anticipated this when I started this site.

In addition to the information reproduced below, I have recently found the Orrick, Herrington & Sutcliffe LLP Weekly Auditor Liability Bulletin very helpful. This firm typically defends the auditors so there’s a good summary of their cases as well as others and lots of links to pleadings, filings and complaints.

I thought I would reproduce some correspondence amongst some accounting bloggers and the esteemed Emeritus Professor Robert “Bob” Jensen of Trinity University. Professor Jensen moderates a listserv for accounting professors that I participate in.

March 13, 2010 message from David Albrecht

I know that most Big4 lawsuits are settled out of court. Is there anyplace on the web a listing of Big 4 lawsuits?

Although it might be argued that settling is a business decision, I think a settlement is a symbolic defeat by the CPA firm.

March 14, 2010 reply from Bob Jensen

Hi David,

Lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in

http://en.wikipedia.org/wiki/Legal_Research

I know of no free Web reference that records all criminal and civil actions where a Big Four firm is a defendant.

Big Four lawsuits can arise in over 100 nations (recently one of the largest actions in history was filed in Hong Kong, where the Ernst & Young partner in charge was actually jailed) — http://www.trinity.edu/rjensen/fraud001.htm#Ernst

The Audit Analytics database has a lot of the auditor lawsuits classified by year —

http://www.auditanalytics.com/

Examples for 2006 are at http://www.trinity.edu/rjensen/AuditingFirmLitigationNov2006.pdf

In the U.S. there are both state and federal jurisdictions. And there can be individual or class action lawsuits brought by plaintiffs. One of the better sources for federal securities class action lawsuits is the Stanford University Law School Federal Class Action Clearinghouse —

http://securities.stanford.edu/

But this by no means covers most of the lawsuits against large auditing firms. In fact, the database has surprisingly few hits for Big Four firms. Many of the SEC lawsuits are not in this database.

Keep in mind that auditors are usually secondary in lawsuits with their clients being the primary defendants. Most of the lawsuits are probably filed in the state where a corporate client is licensed as a corporation, which gives Delaware a lot of lawsuits.

For the past ten years I’ve tried to keep tidbits on the highly publicized lawsuits involving large auditing firms —

http://www.trinity.edu/rjensen/fraud001.htm

Interestingly, auditing firms sometimes win in courts, as recently happened when Ernst & Young emerged as a winner.

For lawsuits dealing with derivative financial instruments I also have a tidbit timeline at

http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Of course the lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in

http://en.wikipedia.org/wiki/Legal_Research

I don’t have time at the moment, but it would be interesting to see how much PwC provides in the Comperio database. Since this database is heavily used by clients, my guess is that Comperio is not a good source for searching auditor lawsuits.

There are also instances where an auditing firm is a plaintiff, usually where it is suing a former client.

There can also be criminal cases like the recent case where the managing partner of PwC in England was charged with stealing money from PwC to pay for the luxurious tastes of his mistress —

http://www.trinity.edu/rjensen/fraud001.htm#PwC

Bob Jensen

March 14, 2010 reply from Orenstein, Edith

Some limited data regarding litigation for the six largest audit firms (U.S. data only, as of 2007) was provided by the Center for Audit Quality (CAQ) – an affiliate of the AICPA, in reports to the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP).

For example, among CAQ’s  reports to ACAP, CAQ’s Jan. 23, 2008 report to ACAP included a section on Litigation. A caveat in the CAQ report states:

“Information regarding litigation is highly sensitive, because of the risk that the data could be used unfairly against a firm in litigation. For these reasons, the data presented in this report were gathered from the six audit firms and aggregated (the data relate only to claims against the six U.S. firms and do not include claims in U.S. courts against any non-U.S. firms that are members of the same networks). To prevent “reverse engineering” of the data to tie specific facts to a specific lawsuit or firm, the data have been grouped – for example, aggregating data from several different years. The litigation data discussed in this report do not include information relating to government inquiries, investigations, or enforcement actions.31″  [Footnote 31 in the CAQ report states: “2007 litigation data in this report reflect submissions by five firms of information as of December 20, 2007 and by one firm of information as of November 30, 2007.”]

Additionally, CAQ’s Second Supplement to ACAP (4/16/08) included data on private actions and shareholder class actions.

Treasury’s ACAP published its final report  in 2008; here is related summary in FEI blog.

Edith Orenstein

Director of Accounting Policy Analysis and Communications

Financial Executives International (FEI)

1250 Headquarters Plaza, West Tower, 7th Floor

Morristown, NJ  07932

(973) 765-1046

eorenstein@financialexecutives.org

web: www.financialexecutives.org

blog: www.financialexecutives.blogspot.com

twitter: www.twitter.com/feiblog

March 14,2010 message from Francine McKenna

Dave,

I try to keep up as best I can on litigation against the auditors. It’s not easy since I am not an attorney and do not have access to their databases.  I depend of the “kindness of lawyer strangers” to help me often.

It’s not easy since auditors are often one of many defendants in a class action lawsuit, for example. Often news reports or other blog posts do not include all the defendants if auditors are not the focus of the story.  Which they are often not.  Which is why my site is useful.

I look at the lists compiled by Kevin LaCroix on his site D and O Diary of securities litigation and class action suits, Francis Pileggi of Delaware Litigation also mentions suits against or by auditors (as in the Deloitte suit against their own Vice Chairman ) when they make it to Delaware Chancery Court. They both keep an eye out for me now and it was Francis who alerted me to both the judgement against Deloitte’s Flanagan and the recent “in pari delicto” case against PwC.

I also use a site called Justia to look for all other suits against the firms, often focused on suits in Federal Courts.

http://dockets.justia.com/

The Stanford Law School database is also useful for getting the actual filings and documents. http://securities.stanford.edu/

Interestingly PwC does a great job tracking everyone else’s 10b-5 litigation  – except their own.  You will never see auditor litigation broken out in their report. — http://10b5.pwc.com/public/Default.aspx

Bob is right to say that there’s a whole slew of suits, at times very large and important that are outside of the US, such as the ones in Hong Kong against EY.  For that I count on Google Alerts (and my blog readers) to alert me, sometimes at odd hours of the night, of new developments.

https://francinemckenna.com/category/auditor-litigation/

McKenna On Auditor Litigation: Securities Docket’s Mid-Year Update and Schein v. EY

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