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Accounting Firms Escaped Securities Lawsuits This Year

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By Michael Cohn
December 28, 2012

Accounting firms have frequently found themselves in the cross-hairs of class-action lawsuits filed by shareholders over their audits of public companies, but that trend may be changing.

NERA Economic Consulting found that no accounting firm has been named as a defendant so far this year in a federal securities fraud lawsuit, according to The New York Times. Back in the period of 2005 to 2009, approximately 12 percent of the securities class-action suits that were filed named accounting firms as co-defendants, but up through November of this year, there hasn’t been a single securities class-action suit filed against an accounting firm.

NERA also found in its midyear report on securities class-action litigation that fewer lawsuits are also being filed against companies on allegations of accounting fraud, declining from nearly 40 percent in 2011 to roughly 25 percent in the first six months of this year.

One reason for that sharp decline may be the Supreme Court’s ruling in 2008 in the case Stoneridge Investment Partners LLC v. Scientific Atlanta Inc., which raised the bar for recovering damages from third parties in securities fraud lawsuits.

Another factor could be the work of the Public Company Accounting Oversight Board, which was established 10 years ago by the Sarbanes-Oxley Act to regulate auditing firms in the wake of the demise of Arthur Andersen.

The PCAOB’s periodic inspections of accounting firms’ audits of public company clients may be a painful experience for the firms to endure. But the findings could also be saving the firms millions of dollars they would have to otherwise spend on fighting and ultimately settling shareholder lawsuits over any perceived lapses.

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