The other day I phoned an old acquaintance whom I hadn't spoken to in nearly eight years.I knew him only as a consultant to the hospitality industry, but in a previous life, he had been a partner at Laventhol & Horwath, which at one time was the seventh-largest accounting firm in the country with nearly 3,400 employees.
The firm, which had specialized in, among other niches, accounting services for the commercial real estate industry, had been broadsided by a confluence of unfortunate events, some of which in all honesty were self made.
First, there was the late 1980s recession that left a trail of unoccupied office buildings and rock-bottom rents.
Adding to that malaise were more than 100 legal actions against the firm charging sloppy audit work, the most high profile being attached to evangelist Jim Bakker's PTL ministry in Charlotte, N.C.
Ultimately, the firm was staring at litigation that nearly equaled the gross national product of some third world nations and thus, in late 1990, the partners voted to dissolve the firm in a bankruptcy.
Years later, he somberly pointed out a docked boat explaining that it had once been his but as part of the firm's liability settlement, he was forced to sell it.
More than a decade later, Arthur Andersen would crash even harder, prompting concerns among the profession and regulators about the dangers of an audit implosion eradicating another major audit firm.
More recently, the Center for Audit Quality weighed in on the issue, dashing off a letter to the Treasury Department's Advisory Committee on the Auditing Profession, warning that the group has not done enough to safeguard against what it labeled "catastrophic litigation" to auditors.
CAQ executive director Cindy Fornelli wrote that the committee's second in a series of draft reports to hone the audit profession was an improvement over the first efforts, but still fell far short of helping dash auditor liability risks. She commented that the second draft did not contain even limited litigation reforms, specifically exclusive federal jurisdiction and a uniform standard of care.
She also claimed the committee failed to consider any of the measures previously proposed by her group including strengthened bankruptcy defenses and a liability cap system for audit firms.
Actually, I'm of two minds on this.
On one hand, I think that the dissolution of another major audit firm would be disastrous for the profession, not to mention its reputation that it worked so hard to rebuild after Enron/Andersen as well as the effect on investor confidence levels. But I'm also a bit wary that being shielded with unlimited liability may not always inspire high audit quality. Accountability to some degree often does wonders to ratchet up performance.
My friend revealed that he's thought long and hard about the liability issue over the past 18 years and how he was unfairly forced to pay for the actions of others.
That's what happens, he said, when you suddenly find yourself with a lot of time on your hands and no boat to spend it on.
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