All Points Bulletin: Auditor Litigation Spans The Globe

This was originally published at GoingConcern.com on March 31, 2010.

The Big 4 audit firms are preoccupied with significant legal issues in the US. KPMG has an upcoming trial for the New Century collapse. PwC is still being sued by angry AIG shareholders. Deloitte has plenty to do defending themselves against Bear Stearns and Merrill Lynch litigation. And Ernst & Young, poor EY, has Lehman.

Managing these cases requires exorbitant amounts of the US firms’ time and money. Their international umbrella firms and, in many cases, members firms in other parts of the world are also burdened. It’s my estimate that Big 4 leadership spends 75% of their time on litigation matters. An embarrassing amount of partner capital that could be used to train professionals, improve quality and stop staff and partner cuts is being spent instead on legal bills.

But let’s consider for one moment that the US firms are not the center of the universe for the global franchise. Although US revenues are significant, profits and growth are not necessarily stellar compared to the potential in other geographies.  So the firms will plow foreign fields instead and hope for revenues from IFRS conversion to save the US.

There’s quite a bit of news coming out of India, for example. The Times of India reported,  “[Dennis] Nally has decided to visit India once in every three months as part of PwC’s enhanced focus on emerging markets…while the Price Waterhouse name being dragged into India’s biggest corporate fraud did have a negative impact on the PwC brand, the controversy did not result in a large number of its clients either walking away or driving harder bargains.”

Maybe he forgot about all the PW partners and employees leaving the India firm.  In any event, we will never know since the firms do not report detailed results or headcounts by country. Rest assured, Dennis Nally is not going to India because he likes matar paneer.

In spite of their optimism about non-US geographies, KPMG, PwC and EY have plenty to worry about outside the US, too. The Madoff feeder fund lawsuits are now rolling.  Although claims are being made in the US, the majority of the action will be about member firms in Luxembourg, Canada, Dublin, the UK, Bermuda and the Cayman Islands.

EY still has to worry about Hong Kong, where a scandal seems to erupt every month.  Even though the EY international firm has refused to chip in for these claims, the loss or crippling of an important franchise has an effect on service to all multinationals in that country.

Just ask PwC about India. Or Japan. Or Russia.

Or you can ask Deloitte about Italy. Deloitte is facing its second messy situation in Milan. Maybe they should have implemented the “Grant Thornton solution” after Parmalat – cut them off. But then how would they provide service to multinationals in Italy?

The Lehman report has galvanized accounting industry critics in the UK.

Ernst & Young’s attempts to brush aside criticism of its role in the collapse of Lehman Brothers has failed to deter critics of the profession…Tory shadow chancellor George Osborne said yesterday he wants reform as much as Liberal Democrat treasury spokesman Vince Cable and Prem Sikka. Sikka has spent more than 20 years arguing that accountancy firms appear, like the Woody Allen character Zelig, in the foreground at every major corporate crash, only to fade from view when difficult questions are asked.

There are additional risks for clients when the external auditor performs work to support an audit in multiple global locations. Audit Committees should understand how and where work is performed, supervised and quality controlled when firms depend on member firms in other parts of the world.

The last out for the audit firms could come from almost anywhere.