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October 28, 2008 6:00 AM

Auditors Should Prepare for Legal Backlash, Report Says

Posted by Brian Baxter

We here at The Am Law Daily have some experience when it comes to reporting on the litigiousness of accounting firms. But if a recent report by corporate governance publication Compliance Week is any indication, auditors had better brace themselves for the inevitable onslaught of litigation that will arise from the economic downturn.

Deloitte & Touche, whose former clients include Bear Stearns, Fannie Mae, and Washington Mutual, is one firm that might find itself coming up against plaintiffs lawyers in the months ahead.

While auditors are likely litigation targets, how likely is it that they'll be found liable for so much of the current mess? Litigators who've gone up against the big accounting firms know that they are among the most zealous when it comes to going to trial.

Patrick Daugherty, chief strategy partner in the business law department at Foley & Lardner, told Compliance Week that confusion about complex financial instruments doesn't have the same air as the fraud that permeated corporate scandals at Enron and WorldCom. Daugherty says plaintiffs are more likely to focus on valuation rules and whether certain assets were written down correctly.

"I suspect [audit firms] are going to have to defend some of this, but I also suspect they're going to win," Daugherty says. "I would expect they'll get out of these suits earlier and at less cost than was the case in Sarbanes-Oxley-inspired litigation following Enron and WorldCom."

Nonetheless, some firms have capitulated. PricewaterhouseCoopers agreed to a $97.5 million settlement with three Ohio pension funds in early October to settle its part in a securities class action filed in 2004 against American International Group. PwC claimed it wanted to avoid the cost of time-consuming litigation.

While the case was unrelated to AIG's $122.8 billion bailout by the federal government, we can't help but wonder how much PwC's defense lawyers at Cravath, Swaine & Moore weighed the potential cost of negative publicity in deciding to settle.

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