Audit firms escape securities lawsuits

Not too long ago, it seemed like it was open season on audit firms.

The numerous scandals that wracked the financial services industry in particular led the industry searching for auditors. The low point might have been the New York Attorney General's decision to file charges against Ernst & Young for shoddy audit work on Lehman Brothers, which helped pave the wave for the firm's implosion.

But a judge this month ruled that the AG has no authority to claim $150 million in fees that the audit firm earned from Lehman. DealBook notes a larger victory for the audit firms. 

Additionally, the SEC has charged KPMG over some audit work for a failed bank in Nebraska. According to an analysis by NERA Economic Consulting, not one accounting firm was named as a defendant in 2012 in a shareholder suit. For the sake of comparison, the firm notes that from 2005 to 2009, 12 percent of securities class action cases included accounting firm co-defendants.

Why have audit firms escaped litigation recently?

Dealbook notes that, "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."

The more positive interpretation is that audit firms really have improved the quality of their audits and that Sarbanes-Oxley, for all its pain, actually improved the process. 

For more:
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