Holding the auditors accountable for missing corporate fraud

by Ian Fraser for QFinance, September 23rd, 2010.

Should accountancy firms be able to walk away from corporate train wrecks Scot-free –  leaving everyone else, including shareholders, bondholders, employees, customers, governments to pick up the tab?

In the wake of the banking and financial crisis, which saw several banks collapse within a few of months of having been given a clean bill of health by their ‘big four’ auditors, this is certainly worthy of examination.

Traditionally, the courts have barred shareholders from pursuing malpractice claims against auditors in cases of corporate fraud. The ‘big four’ audit firms – PricewaterhouseCoopers, Deloitte, KMPG and Ernst & Young – have been able to deftly sidestep the wrath of shareholders and others.

However historic notions of auditor non-liability are now coming under scrutiny. In a landmark case that started on September 14, the New York Court of Appeal is weighing up whether auditors should continue to avoid prosecution.

Two suits are being heard back-to-back. The first is against PwC and is being brought by investors in the bailed-out insurer AIG, which PwC audited. The second case relates to litigation by the bankruptcy trustee of Refco Inc, a failed futures broker in which damages are being sought from a number of Refco’s professional advisers, including its auditors Grant Thornton.

Stuart Grant, a partner in Grant & Eisenhofer, the law firm representing AIG shareholders, believes the case could have widespread ramifications, even if the result will technically only apply in New York. (continue reading… )

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