Accountants Professional Liability Scorecards and Commentary · 2009. 7. 23. · Accountants Professional Liability Scorecards and Commentary Mark Cheffers, Audit Analytics, CEO Robert

Accountants Professional Liability Scorecards and Commentary

Mark Cheffers, Audit Analytics, CEO

Robert Kueppers, Deloitte LLP, Deputy CEO

July 9-10, 200921st Annual ALI-ABA -Accountants’ Liability Conference

IVES Group Inc. phone: (508) 4767007 email: [email protected]

Liability Exposure• Managing Current Case Exposures– Large Settlements– Historical and Current Cases– Madoff/Ponzi Cases– Credit Crisis/Subprime Cases– Other Federal Class Actions– Financial Restatements– Going Concerns– Audit Complexity & Standards Diffusion

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mailto:[email protected]


Liability Exposure• Expanding Theories of Audit Failure– Auditor as Global Firm Guarantor– Auditor as Third Party Investee Investigator– Auditor as Predictor of Future Business

Success– Auditor as Fidelity Bond/Fraud Guarantor– Auditor as Arbiter of a Diffusion of

Standards

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IVES Group Inc. phone: (508) 4767007 email: [email protected] 4

Source: AuditAnalytics.com

558

82

418

16865

193245

628

0

259 217 255

429

1239

393

1006

383

109

0

200

400

600

800

1000

1200

1400

Top 50 All Time Accounting Malpractice Settlements (1991‐2009)Totals by Year

Total Settlements (US$ Millions)



Source: AuditAnalytics.com & Public Accounting Report

783.5

1254.0

1920.5

1418.61267.3

0.0

500.0

1000.0

1500.0

2000.0

2500.0

Andersen Deloitte EY KPMG PwC

Top 50 All Time Accounting Malpractice Settlements (1991‐2009)Totals by Firm

Total Settlements (US$ Millions)




Top 50 Accounting Malpractice Settlements as of May 2009(in US$ Millions)

$3,455.6 $3,188.3

Public

Non-Public

$2,900.0

$3,743.9 Government

Non-Government



Notable Exposures - From 2006: Current Status

• Fannie Mae• Delphi Corp*• American International

Group*• Tenet Health Care• REFCO• Dell Co• Computer Associates• United Health• AOL Time Warner*• Parmalat*

• Tyco International*• HealthSouth*• Freddie Mac• Royal Dutch Shell• Dynegy• PNC Financial• Sprint• Nortel Networks• Lloyds• Doral Financial

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Notable Exposures - 2009 (excl. 2006 list)• E.S. Bankest• Satyam• Madoff/Arthur Nadel• New Century Financial• Moody’s• UBS• Royal Bank of Scotland• Goldman Sachs• The Blackstone Group• Wachovia• Merrill Lynch

• Citibank• Bear Stearns• Bank of America• Wells Fargo• Washington Mutual• Sallie Mae• Royal Bank of Canada• Societe Generale• State Street Corp• Oppenheimer Funds• Lehman Brothers

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Madoff Ponzi SchemeSecurities Class Action Plaintiff Law Firm List

(as of May 15, 2009)

Accounting Firms Cases

KPMG 1

Ernst & Young 3

PricewaterhouseCoopers 1

Deloitte 0

BDO 2

Grant 0

Regional 4

# Cases Filed: 25# Feeder Funds Implicated: 21# Auditors Presently Named: 8 (11 cases)



Madoff Ponzi SchemeSecurities Class Action Plaintiff Law Firm List

(as of May 15, 2009)

Plaintiff Law Firms Cases

Coughlin Stoia Geller Rudman & Robbins LLP 4

Wolf Haldenstein Adler Freeman & Herz LLP 3

Abbey Spanier Rodd Abrams & Paradis LLP 2

Hagens Berman Sobbel Sharpiro LLP 2

# Cases Filed: 25# Feeder Funds Implicated: 21# Auditors Presently Named: 8 (11 cases)



Credit CrisisClass Actions Where Auditors Named

(by number of cases from 2007 to May 2009)

Accounting Firm Cases

KPMG 2

PricewaterhouseCoopers 1

Deloitte 1

Ernst & Young 1

BDO 0

Grant 4

Regional 1

# Cases Filed: 179# Auditors Presently Named: 6 (9 cases)



Credit CrisisTop 5 Securities Class Action Plaintiff Law Firms

(by number of cases from 2007 to May 2009)

Note: Some cases may involve more than one plaintiff, each with separate representation, and thus more than one law firm may be counted in a single case. Not shown above are the following law firms: 4 firms with 5 cases, 4 firms with 4 cases; 5 firms with 3 cases; 18 firms with 2 cases; and 85 firms with 1 case. For a complete list contact Audit Analytics, a division of the IVES Group.

Plaintiff Law Firm CasesCoughlin Stoia Geller Rudman & Robbins LLP 74

Abraham Fruchter & Twersky 9

Seeger Weiss LLP 9

Stueve Siegel Hanson 9

Wolf Haldenstein Adler Freeman & Herz LLP 7

Barroway Topaz Kessler Meltzer & Check, LLP 6

Glancy Binkow & Goldberg LLP 6

# Cases Filed: 179# Auditors Presently Named: 6 (9 cases)



Federal Securities Class Action Litigation SummaryBig 4 Auditors

Note: The year displayed represents the year the action was filed with the court.

Public Accounting Firm

Number of Claims Filed

2000 2001 2002 2003 2004 2005 2006 2007 2008

Deloitte LLP 11 8 9 14 4 4 3 6 6

Ernst & Young LLP 6 5 13 18 10 4 20 1 7

KPMG LLP 8 5 14 9 14 6 6 5 6

PricewaterhouseCoopers LLP 13 4 11 15 19 9 7 9 5

Big Four Total 38 22 47 56 47 23 36 21 24

Open Cases 1 0 7 18 16 4 14 19 21



Federal Securities Class Action Litigation SummaryNational Firm Auditors

Note: The year displayed represents the year the action was filed with the court.The numbers displayed in the row for Crowe Horwath LLP includes actions against Crowe Chizek & Company LLC.

Public Accounting Firm

Number of Claims Filed

2000 2001 2002 2003 2004 2005 2006 2007 2008

Grant Thornton LLP 2 2 0 2 2 8 3 4 1

BDO Seidman LLP 0 0 2 6 1 3 1 5 4

McGladrey & Pullen LLP 0 0 0 1 0 1 2 0 0

Crowe Horwath LLP 0 1 2 2 2 0 1 3 0

Total 2 3 4 11 5 12 8 12 5

Open Cases 0 1 1 4 2 4 6 12 5



Federal Securities Class Action Litigation SummaryTop Twelve Regional Tier Auditors

Note: The year displayed represents the year the action was filed with the court.

Public Accounting FirmNumber of Claims Filed

2000 2001 2002 2003 2004 2005 2006 2007 2008

Moore & Associates Chartered 0 0 0 0 0 0 0 0 0

Malone & Bailey PLLC 0 0 0 0 0 0 0 0 0

Sherb & Co LLP 0 0 0 2 2 0 0 1 0

Beard Miller Company LLP 0 0 0 0 0 0 0 0 0

Moss Adams LLP 0 0 0 0 0 0 0 1 0

UHY LLP 0 0 0 0 0 0 0 0 0

Madsen & Associates CPAs Inc 0 0 0 0 0 0 0 0 0

Child Van Wagoner & Bradshaw PLLC 0 0 0 0 0 0 0 0 0

Hein & Associates LLP 0 0 0 1 1 0 0 0 0

Marcum & Kliegman LLP 0 0 0 1 0 0 0 0 0

Chisholm Bierwolf & Nilson LLC 0 0 0 0 0 0 0 0 0

Kabani & Co Inc 0 0 0 0 0 0 1 0 0

Total 0 0 0 4 3 0 1 2 0

Open Cases 0 0 0 1 1 0 1 2 0



Top 15 Securities Class Action Defense Law Firms Representing the Big 4(by number of cases from 2000 to May 2009)

Note: Some cases may involve more than one Big 4 defendant. A total of 136 law firms represented the Big 4 from 2000 to May 2009. For a complete list contact Audit Analytics, a division of the IVES Group

Defense Law Firm CasesMayer Brown LLP 15

Gibson Dunn & Crutcher LLP 14

Latham & Watkins LLP 14

Davis Polk & Wardwell 13

Sidley Austin LLP 12

Hughes Hubbard & Reed LLP 9

Kirkland & Ellis LLP 8

Willkie Farr & Gallagher LLP 7

Bingham McCutchen LLP 6

Cravath Swaine & Moore LLP 6

Orrick Herrington & Sutcliffe 6

Vinson & Elkins LLP 6

Hogan & Hartson LLP 5

Sutherland Asbill & Brennan LLP 5

Jones Day 5



Quality of Financial Reporting - Calendar Year 2008 has Experienced a Second Year of Decline in Restatement Disclosures

2008 Restatements

• 778 Unique Filers

• 869 Restatements

• 30% Drop from Prior Year

• Appears as if registrants are adapting to the rigorous financial reporting requirements of SOX

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579647

759875

1403

1565

1111

778

616696

819957

1555

1800

1235

869

2001 2002 2003 2004 2005 2006 2007 2008

Total Restatements by YearUnique filers Restatements



Calendar Year 2008 also Experienced a Drop in the Severity of Restatements1. Average Cumulative Impact on Net Income per Restatement (companies on Amex, NASDAQ & NYSE)

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• Not only are the number of restatements down in 2008, each of these fewer restatements has a much smaller negative effect than in the prior two years.


-$25,000,000.00

-$20,000,000.00

-$15,000,000.00

-$10,000,000.00

-$5,000,000.00

$0.00

2006 2007 2008

-$22,552,509.53

-$7,444,280.39-$6,125,966.93

Average Income Adjustment Per Restatement

Average Income Adjustment Per Restatement



Calendar Year 2008 also Experienced a Drop in the Severity of Restatements (continued)

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2. No Impact on Income (companies on Amex, NASDAQ & NYSE)

• In 2008, a Total of 99 out of 296 Restatements had No Impact on the Income Statement.


2006 2007 2008

29.57%

33.18% 33.45%

Percentage of Restatements with No Impact on Income

Restatements with no Impact on Income



Calendar Year 2008 also Experienced a Drop in the Severity of Restatements (continued)3. Average Number of Days Restated

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• The Average Restatement Period Peaked in 2005

• The Time Period Dropped in 2006 and again in 2007 and 2008


2001 2002 2003 2004 2005 2006 2007 2008

466537 573

621

747 718646

479

Average Restatement Period per YearAverage Number of Days Restated



Calendar Year 2008 also Experienced a Drop in the Severity of Restatements (continued)4. Average Number of Issues per Restatement

21

• A Taxonomy of Over 50 Issues Monitored and Graded

• In 2008, the Average Restatement Implicated only 1.66 Financial Accounting Issues

• Lower than the Prior 7 Years


2001 2002 2003 2004 2005 2006 2007 2008

2.00 2.12 2.13 2.192.43

2.01 1.901.66

Average Issues per RestatementAverage Number of Issues per Restatement



The Top 7 Issues have been Common over the Last 8 Years, but Cash Flow (SFAS 95) has Steadily Increased to Take the 3rd SpotTop Restatement Issues between 2001 and 2008

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0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2001 2002 2003 2004 2005 2006 2007 2008

Perc

ent o

f Res

tate

men

ts C

iting

Issu

e

Debt, quasi-debt, warrants & equity ( BCF) security issuesExpense (payroll, SGA, other) recording issuesCash flow statement (SFAS 95) classification errorsDeferred, stock-based and/or executive comp issuesAcquisitions, mergers, disposals, re-org accounting issuesRevenue recognition issues

Tax expense/benefit/deferral/other (FAS 109) issues



Going Concerns(Number of Auditor Opinions Qualified with a Going Concern Assumption)

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16.8%

19.2% 18.5%

15.0%15.9%

16.9%18.4%

20.9%22.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008*

Number of Going Concern Auditor Opinions

Note: The research above is based on SEC filings as of May 27, 2009 (an Audit Opinion database download of May 29, 2009). Therefore, the 2008 percentage is a prediction based about 95% of the expected audit opinions for the 2008 year end.



Going Concerns(Number of Auditor Opinions Uncertain of its Going Concern Assumption)

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2805

30652901

2617 26002747

2924

3293 3304

0

500

1000

1500

2000

2500

3000

3500

2000 2001 2002 2003 2004 2005 2006 2007 2008*

Number of Going Concern Auditor Opinions



Going Concerns As a Percentage of Total Auditor Opinions

25



2000 2001 2002 2003 2004 2005 2006 2007 2008*

Going Concerns 2,805 3,065 2,901 2,617 2,600 2,747 2,924 3,293 3,304

Total Auditor Opinions 16,676 15,954 15,656 17,484 16,390 16,296 15,888 15,773 14,944

% of All Opinions 16.82% 19.21% 18.53% 14.97% 15.86% 16.86% 18.40% 20.88% 22.11%



Going Concern Percentages(Breakdown by Market Status)

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TotalGoing

Concerns

NYSE Nasdaq Amex OTCBB Non‐Tickered

GoingConcerns

%Going

Concerns%

GoingConcerns

%Going

Concerns%

GoingConcerns

%

2008 (partial) 2,964 19 0.64% 123 4.15% 76 2.56% 1,854 62.55% 892 30.09%

2007 3,293 10 0.30% 66 2.00% 37 1.12% 1,929 58.58% 1,251 37.99%



Audit Complexity and Diffusion of Standards

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Example: SEC Comment Letters Communications Equipment Industry

Securities Regulations Referred to: 135

Accounting Standards Referred to: 210

Other Requirements Referred to: 45



Audit Analytics® provides intelligence on over 20,000 public companies and 1,500 accounting firms. Our data includes detailed categorizations of issues and is considered by many professionals to be the best primary data source for tracking and analysis of the following public company disclosures:

Auditor InformationKnow who is auditing whom, their fees, auditor changes, auditor opinions and more.

Sarbanes-Oxley DisclosuresTrack Section 404 internal control disclosures and Section 302 disclosure controls.

Financial Restatements and SEC Comment LettersIdentify financial restatements by type, auditor and peer group. Analyze by date,period and specific issue. Benchmark company financial reporting issues by using our comprehensive SEC

Comment Letter database

Litigation & Legal DisclosuresSearch all federal litigation by auditor, company and litigation type. Know who isrepresenting whom.

Corporate GovernanceTrack director & officer changes, audit committee members, C-level executives andtheir biographies.

For Additional information on our services and research, please visit our website at www.AuditAnalytics.com, call us at (508) 476-7007 or e-mail [email protected]

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Accountants Professional Liability Scorecards and Commentary

Supporting Schedules

July 9-10, 200921st Annual ALI-ABA -Accountants’ Liability Conference

Documents

Accountants Professional Liability Scorecards and Commentary · 2009. 7. 23. · Accountants Professional Liability Scorecards and Commentary Mark Cheffers, Audit Analytics, CEO Robert