The Connected Accountant

Audit firms left unprotected against claims of negligence

So says the Times of London.  In the article, Alex Spence details that, under pressure from the SEC, the UK government has declined to limit the exposure of auditors to damages.

Apparently, the SEC fears a 'you scratch my back' situation, where auditors issue a less than stringent report in return for an agreed restriction on auditor liability.  A version of this already exists in the UK under the 2006 Companies Act, where auditor liability can be limited if shareholders approve. To date, no major UK companies have taken advantage of this provision.  No doubt investors would experience a certain 'chilling effect' upon disclosure of such a deal.

Spence goes on to list the current firm-killing litigation against the Final 4:

KPMG A defendant in a class-action lawsuit in the Southern District of New York against Tremont, a Bernard Madoff feeder fund

Ernst & Young Sued by investors in a Luxembourg court with UBS for oversight of a European Madoff feeder fund

PwC Included in several lawsuits in Canada claiming damages of up to $2 billion against Fairfield Sentry, a big Madoff feeder fund

KPMG Sued in the US for at least $1 billion by creditors of New Century Financial, a failed sub-prime mortgage lender, which claimed that KPMG’s auditing was “recklessly and grossly negligent”

Deloitte Sued by the liquidators of two Bear Stearns-related hedge funds that collapsed at the start of the credit crunch

No doubt the Final 4 will be ready with their 'too big to fail' arguments should any of these appear to be headed to a finding against the firms.

Seismic Change - Or Moving The Goalposts?

In the four years since the Parmalat Fraud case hit, regulators have been attempting to define groupings of accounting firms.

Broadly, they wanted to prevent looser affiliations of accounting firms marketing themselves as a 'joined up global solution' and then denying responsibility when one of the affiliates made an error.

This meant that regulations were designed (based on an IFAC model) that defined networks and associations of accounting firms.  Networks could brand under a single name, rely upon work performed in another network office, and gain traction in the marketplace hungry for alternatives to the Final 4.  Associations would not have to do system-wide independence checks, might gain some liability protection for members, but were also enjoined from developing a 'market identity'.  And then it all went pretty quiet. Until now.

The Swiss-based grouping of Horwath now has a 'standard bearer' firm in the US, the old Crowe Chizek firm, now known as Crowe Horwath, and heavily branded as such. Where this leaves the members of Horwath in the US other than Crowe is a good question.  A similar occurrence has taken place at Baker Tilly, where WI based Virchow Krause are, "pursuing a name change that will make us the exclusive U.S. branded firm in the Baker Tilly Globally Branded Network."

It is very possible that we will see further changes among firms and their network/association affiliations as firms map their strategic and tactical needs to the direction that their grouping of firms has selected.