Tammy Whitehouse over at Compliance Week does a thorough job on the largest audit firms and their fear of catastophic litigation. Yes, they’re admitting it – Tammy says they’re pleading with legislators – and fighting any legislative urges to open more avenues for lawyers and their clients to sue them.
The Dodd-Frank Act gave the Securities and Exchange Commission the authority under existing antifraud rules in Section 10(b) of the Securities and Exchange Act of 1934 to take action in cases involving transnational securities fraud. Congress also instructed the SEC through Dodd-Frank to get some public feedback and conduct a study to determine the extent to which such actions should be allowed even for private litigants. The SEC issued a call for comments to kick off the study. That prompted seven major firms, including all of the Big 4 firms, to pool their legal resources and plead for protection. In a joint comment letter to the SEC, the audit firms remind the SEC that they already face claims in the United States that are big enough to threaten their existence. Now they’re worried that allowing private actions related to transnational securities fraud will enable that threat to seep into their international audit networks as well.
I wrote last week in Forbes that audit firms are more interested in milking their lucrative government-mandated franchise to perform audits than accepting full responsiblity for poor performance of their public duty to their true clients – shareholders of public companies.
Auditors send professionalism packing and abdicate their public duty to shareholders when legislation threatens the lucrative business of being a public accounting firm.
Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the SEC complete a study to determine, “the extent to which private rights of action under the antifraud provisions of the Securities and Exchange Act of 1934 should be extended to cover transnational securities fraud”.
In a recent decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), the Supreme Court significantly limited the extraterritorial scope of Section 10(b) of the Exchange Act. In the Dodd-Frank Act, Congress restored the ability of the [Securities and Exchange] Commission and the United States to bring actions under Section 10(b) in cases involving transnational securities fraud. Congress further directed the Commission to conduct a study to determine whether, and to what extent, private plaintiffs should also be able to bring such actions…Exploration of these issues will also help inform how the Commission can best protect investors and the integrity of U.S. markets in an environment in which a significant volume of securities transactions are conducted across borders.
I’ve written extensively about the litigation risks of the largest global audit firms. The risk of failure of a large member firm outside of the United States is especially acute. There have been several big scares in recent years. There are some significant cases still pending. However, others have been dismissed or could be dismissed based on Morrison.
The Big 4 audit firms have always been preoccupied with significant legal liability in the US. 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.
On top of the ever-present specter of potentially catastrophic liability, large U.S. audit firms have been burdened by the need to spend a meaningful percentage of their audit-related revenues—15.1% in FY 2008—on litigation protection.
That’s an embarrassing amount of partner capital that could be used to train professionals, improve quality, and stop staff and partner cuts but is instead being spent on lawsuits where clients and regulators say they didn’t perform their government-mandated public duty well.
Or at all.
For the rest, please go to Forbes.