Chapter _20, Legal Liability

Chapter _20, Legal Liability - ACCY360/560 Assurance...

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ACCY360/560 Assurance Services "Auditors' Legal Liability" Chapter #20 I. General comments regarding the "litigation explosion" A. Some FACTS (from R. Mednick, in Journal of Accountancy , Sept. 1987, pp. 118-122.) 1. More suits have been filed against accountants in the past 15 years than in all the previous history 2. Insurance premiums to CPA firms have increased by 500% since 1984, while coverage has been cut in half, and deductibles have increased many times over (if insurance is still available at all) B. More recent FACTS (from 11/12/96 speech by R. Mednick, then AICPA Chairman) 1. For the latest year available (1993), the Big Six firms, on average, each spent more than $100 million on litigation costs, net of insurance coverage 2. Litigation was a significant factor in the demise of 2 non-Big Six firms in the 1990s (Laventhol & Horwath; 3. Class action securities suits more than tripled from 1988 to 1991 – and 1 in 12 of the companies listed on the NYSE were so sued during that 3-year period 4. A majority of the 332 cases identified in the period 1988-91 were handled by only 7 law firms (the largest firm was filing, on average, 1 class action every 4.2 business days) 5. These Federal securities suits represented about 10% of the suits (but 30% of the alleged damages) against accountants; however, the “vast majority” of lawsuits were brought in state courts C. The Big Six collectively issued a position paper, "The Liability Crisis in the United States: Impact on the Accounting Profession," in 1992 1. "An epidemic of litigation" --"A small group of attorneys is reaping millions of dollars by bringing federal securities fraud claims (under SEC Rule 10b-5) against public companies whose only crime has been a fluctuation in their stock price. These attorneys use the threat of enormous legal costs, a lengthy and disruptive discovery process, protracted litigation, and damage to reputation to force large settlements." 2. "Financial crisis for the accounting profession" --reports that in 1991 firms spent 9% of audit/acctg related revenues on settling & defending against lawsuits; in 1990 that was 7.7% (a 1994 article in The Economist reported a rate of 13% in 1993)
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2 3. "Needed reforms" --(1) proportionate liability (instead of joint-and-several ); (2) federal securities reform, esp. regarding Rule10b-5 ; and (3) similar reforms at the individual state levels; D. To be fair, prior "audit failures" & related litigation have been responsible for many of the specific guidelines added to our professional litigation. But the "fairness" of many recent
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  • Spring '08
  • T
  • U.S. Securities and Exchange Commission, Private Securities Litigation Reform Act, Securities Exchange Act of 1934, SEC Rule 10b-5

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Chapter _20, Legal Liability - ACCY360/560 Assurance...

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