As founding partner of Milberg Weiss Bershad & Schulman LLP, Melvyn I. Weiss is generally considered one of the country's premier class-action litigators, particularly in the areas of accounting and securities fraud.
His firm has been responsible for some $45 billion in recoveries since its inception, with a roster of high-profile class-action judgments against companies such as Rite Aid, Lucent Technologies, Raytheon, Oxford Health Plans and Prudential Securities.
Outside the securities fraud arena, Weiss was also instrumental in helping recover some $6 billion from banks in Switzerland and Germany to benefit Holocaust victims. He is also a frequent lecturer and author on legal issues affecting the accounting profession.
Recently, he spoke with Accounting Today on the current state of the accounting profession, its future and how practitioners can protect themselves from potential litigation in a climate of heightened regulatory pressure.
You were one of the first class-action attorneys to aggressively pursue accounting fraud some 30 years ago. Outside of the obviously larger scope of the current examples of accounting fraud, how has the paradigm of class-action litigation changed for your firm since the 1970s? For example, is it harder to prove?
Weiss: With the globalization of American businesses and the number of foreign issuers, investors and other users rely more and more on financial statements that, in whole or in part, are audited abroad. In addition, the recent news of international financial fraud, such as at Ahold, Lernout & Hauspie, Royal Dutch/Shell and Parmalat, among others, has brought to the forefront the issue of fraudulent financial reporting by overseas companies.
In most instances, the audit opinion on the company's financial statements is typically from a U.S. firm, which relied on a foreign affiliate to conduct the portion of the audit relating to the company's foreign operations. This frequently creates difficulties in obtaining workpapers from auditors in foreign countries. In many instances, only a subset or summary of the workpapers are produced, rather than the original foreign affiliate workpapers. Electronic workpapers also provide many challenges, such as intentional or unintentional altering. Language barriers also create problems.
Another major problem that has become frighteningly more prevalent is document destruction. The courts, however, are bound to react aggressively against such conduct.
As CPAs expand their practices into new client areas and niches, what are the common but frequently overlooked legal dangers inherent in this era of increased oversight, and what can practitioners do to protect themselves?
Weiss: Clients will increase their reliance on outside consultants to protect them from regulatory and litigation exposure. While the headline cases tend to be the actions brought by third parties, such as shareholders and creditors, the exposure to client malpractice actions are the hidden dangers. Accountants must increase their independence and improve their forensic skills to better protect both their clients and themselves from legal dangers.
CPAs need to be cognizant of how their relationship with the client will be perceived by third parties. Simple common sense should be sufficient to alert practitioners that they are treading in areas that will be perceived to involve conflicts of interest. As an example, if you negotiate a consulting arrangement while performing an audit, the consulting arrangement will be viewed as a payoff for a compliant audit.
You hear and read about CPAs outsourcing a variety of services to other countries. Are there legal ramifications outside the normal risks of doing business that firms that outsource should be aware of?
Weiss: While it is legitimate to be cost-conscious and outsource certain work to other countries, a relaxation of the quality standards will not be tolerated and the plaintiff's bar is highly sensitized to the potential for malpractice in these areas.
For example, accounting firms need to ensure that the high standards touted in the U.S. are consistently applied and utilized by their overseas affiliates. As former SEC chief accountant Lynn E. Turner stated, "[T]here is no guarantee that the foreign affiliate adheres to anything resembling the high-quality auditing standards that U.S. firms must apply to their U.S. clients."
Do you think Sarbanes-Oxley is going to be the linchpin of a whole new generation of class-action suits?
Weiss: Without doubt. The Sarbanes-Oxley Act of 2002 establishes duties and responsibilities for management and consultants. In the past, plaintiffs had to first prove industry standards and then demonstrate failures in order to succeed in court. Such standards were not easily provable and the argument by defendants that these were areas where judgment had to be used reduced plaintiffs' ability to convince a jury that defendants acted with the requisite scienter to hold them liable.
Under SOX, we now have a clearer understanding as to the duties and responsibilities of the board of directors, management and the accounting professionals than in the past. In addition, SOX has created oversight agencies that are likely to be more pro-active in ferreting out improper conduct. It will make it easier for courts to be convinced that the conduct complained about is actionable.
Does the SOX legislation help companies or just expose them to more liability?
Weiss: I think it's logical that a company with enhanced internal controls and increased independent oversight of management by independent directors will be in a better position to avoid litigation. To be sure, some of the most egregious examples of accounting fraud existed in an environment of weak or non-existent internal controls. Some of the basic examples include Waste Management, Rite-Aid, Enron, Sunbeam and CUC. That conduct continues even today - just look at Marsh & McLennan and AIG as examples.
I guess, at bottom, no matter how clear the rules, greed, unfettered power or feelings of omnipotence will lead some people into bad conduct.
As a result of the massive school audit scandal on Long Island, do you think SOX will trickle down to nonprofits as well as SEC issuers?
Weiss: Nonprofit boards are sure to be held to a higher standard of care, given the consequences of lax conduct evident in recent scandals. Litigants and courts may well look to SOX for guidance on how to judge the conduct of those vested with similar responsibilities in private companies and not-for-profit organizations.
But only three provisions of SOX apply to persons other than public reporting companies. These three provisions, generally known as the "Arthur Andersen provisions," make it illegal to:
* Destroy or falsify any record with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any bankruptcy case;
* Knowingly, with the intent to retaliate, interfere with the lawful employment or livelihood of any person providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense; or,
* Obstruct, influence or impede any official proceeding.
The remainder of SOX, including its basic principles, literally applies only to public reporting companies.
Over the next few months, there will be a spate of trials for chief executives charged with fraud and engineering massive accounting scandals. With the recent conviction of WorldCom's Bernie Ebbers, do you feel that that verdict will set the jury "tone" for others on trial?
Weiss: It's unlikely that juries will believe that CEOs didn't know about the fraudulent activities, especially when they were the greatest beneficiaries through their compensation packages. These CEOs cannot have it both ways.
The Public Company Accounting Oversight Board is over two years old. What is your opinion of its effectiveness? Have you noticed a shift toward greater accountability and caution among firms since its creation?
Weiss: It's too early to tell. SOX requires the PCAOB to conduct inspections annually for firms that provide audit reports for more than 100 issuers, and at least triennially for firms that provide audit reports for fewer issuers. The PCAOB has only issued 13 inspection reports. In addition, the PCAOB only conducted "limited inspections" on the Big Four for work performed during 2004. Also, according to the PCAOB Web site, there are no pending enforcement actions against firms.
You have seen a lot of changes in the structure of accounting firms over the years. With everything that has unfolded over the past years, do you envision a "firm of the future," where the business model has been molded to deal with liability and increased legislation?
Weiss: If accounting firms focus on their original purpose, which is the detection and prevention of fraud, then the threat of litigation will be reduced. Developing forensic skills to understand both the client's business and the industries within which it operates is the paradigm for a firm of the future.
Not only users of the financial statements but corporate boards are more and more reliant on the independence and high degree of professionalism of the auditor as "gatekeeper."
Implicit in that responsibility is the ability to understand the essence of the transaction and whether it comports with normal commercial activity. In other words, does it make sense? If it appears to be strange, increase the audit scope, hire consultants, ask a lot of questions and speak directly the top officials of the company and the audit committee of the board, and don't stop until you are satisfied that the essence of what is going on makes sense and is legitimate.
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