Lawsuits targeting accountants, ten years after Enron:
| Accountants Skirt Shareholder Lawsuits
By JONATHAN D. GLATER
DealBook
New York Times
December 27, 2012, 12:30 pm
The accountants who service publicly traded companies are likely to have something to be thankful for this year: shareholders are not filing federal securities fraud lawsuits against them.
Just 10 years ago, public company accountants were in the cross hairs of shareholders, regulators and prosecutors. A criminal indictment destroyed Enron’s auditor, Arthur Andersen. Congress created a new regulator, the Public Company Accounting Oversight Board, to oversee the profession. And in dozens of lawsuits in the years afterward, shareholders named accountants as co-defendants when alleging accounting fraud.
But things have changed. According to NERA Economic Consulting, which tracks shareholder litigation and reported on the decline in accounting firm defendants in its midyear report in July, not one accounting firm has been named a defendant so far this year. One of the study’s co-authors, Ron I. Miller, confirmed that the trend has continued at least through November.
That prompts the question, why don’t shareholders sue accountants anymore?
“To the extent that firms have been burned for a lot of money, they have some pretty strong incentives to try to behave,” Mr. Miller said. “That’s the hopeful side of the legal system: You hope that if you put in penalties, that those penalties change people’s actions.”
The less positive alternative, he added, is that public companies “have gotten better at hiding it.”
From 2005 to 2009, according to the NERA report, 12 percent of securities class action cases included accounting firm co-defendants. The range of federal securities fraud class action cases filed per year in that period was 132 to 244.
The absence of accounting firm defendants this year can probably be explained at least in part by court decisions; the Supreme Court has issued rulings, as in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. in 2008, making it more difficult to recover damages from third parties in fraud cases.
So perhaps more shareholder suits would take aim at accountants, if the plaintiffs believed that their claims would survive a defendant’s motion to dismiss. And it is possible that plaintiffs will add accounting firm as defendants to existing cases in the future, if claimants get information to support such claims.
Over all, fewer shareholder class action lawsuits are based on allegations of accounting fraud, as opposed to other types of fraud. The NERA midyear report found that in the first six months of 2012, about 25 percent of complaints in securities class action cases included allegations of accounting fraud, down from nearly 40 percent in all of 2011.
Perhaps the Sarbanes-Oxley Act, the legislative response to the accounting scandals of the early 2000s, actually worked, Mr. Miller said.
“There’s been a lot of complaining about SOX, and certainly the compliance costs are high for smaller publicly traded companies,” he said, but accounting fraud “is to a large extent what SOX was intended to stop.”
Public company accountants still have potential civil liability to worry about, said Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission who teaches at Stanford Law School. Regulators, he said, are investigating potential misconduct involving accounting firms.
“There’s some coal in that stocking,” Professor Grundfest said, “because all of the major public accounting firms have their knickers in a knot with the S.E.C. over accounting practices involving their China affiliates.”
Jonathan D. Glater, who for several years covered the legal profession and law schools for The New York Times, now teaches at the University of California, Irvine, School of Law.
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