Accountants (Big 4s) Professional Liability (audit analytics 2009)

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Very interesting figures and exhibitions regarding the potential liability of the external accountancy firms, particularly the Big 4s, in light of their almost absolute presence in every mayor fraud and financial scandal in the past decade.

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Accountants (Big 4s) Professional Liability (audit analytics 2009)

  1. 1. Accountants Professional Liability Scorecards and Commentary Mark Cheffers, Audit Analytics, CEO Robert Kueppers, Deloitte LLP, Deputy CEO July 9-10, 2009 21st Annual ALI-ABA - Accountants’ Liability Conference
  2. 2. 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 IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 2
  3. 3. 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 IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 3
  4. 4. Top 50 All Time Accounting Malpractice Settlements (1991-2009) Totals by Year1400 12391200 10061000800 628600 558 418 429 393 383400 245 259 255 193 217 168200 109 82 65 0 0 Total Settlements (US$ Millions) Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 4
  5. 5. Top 50 All Time Accounting Malpractice Settlements (1991-2009) Totals by Firm2500.02000.0 1920.51500.0 1418.6 1254.0 1267.31000.0 783.5 500.0 0.0 Andersen Deloitte EY KPMG PwC Total Settlements (US$ Millions) Source: AuditAnalytics.com & Public Accounting Report IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 5
  6. 6. Top 50 Accounting Malpractice Settlements as of May 2009 (in US$ Millions) $3,188.3 $3,455.6 Public Non-Public $2,900.0 $3,743.9 Government Non-Government Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 6
  7. 7. Notable Exposures - From 2006: Current Status• Fannie Mae • Tyco International*• Delphi Corp* • HealthSouth*• American International • Freddie Mac Group* • Royal Dutch Shell• Tenet Health Care • Dynegy• REFCO • PNC Financial• Dell Co • Sprint• Computer Associates • Nortel Networks• United Health • Lloyds• AOL Time Warner* • Doral Financial• Parmalat* IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 7
  8. 8. Notable Exposures - 2009 (excl. 2006 list)• E.S. Bankest • Citibank• Satyam • Bear Stearns• Madoff/Arthur Nadel • Bank of America• New Century Financial • Wells Fargo• Moody’s • Washington Mutual• UBS • Sallie Mae• Royal Bank of Scotland • Royal Bank of Canada• Goldman Sachs • Societe Generale• The Blackstone Group • State Street Corp• Wachovia • Oppenheimer Funds• Merrill Lynch • Lehman Brothers IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 8
  9. 9. Madoff Ponzi Scheme Securities Class Action Plaintiff Law Firm List (as of May 15, 2009)# Cases Filed: 25# Feeder Funds Implicated: 21# Auditors Presently Named: 8 (11 cases) Accounting Firms CasesKPMG 1Ernst & Young 3PricewaterhouseCoopers 1Deloitte 0BDO 2Grant 0Regional 4 IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 9
  10. 10. Madoff Ponzi Scheme Securities Class Action Plaintiff Law Firm List (as of May 15, 2009)# Cases Filed: 25# Feeder Funds Implicated: 21# Auditors Presently Named: 8 (11 cases) Plaintiff Law Firms CasesCoughlin Stoia Geller Rudman & Robbins LLP 4Wolf Haldenstein Adler Freeman & Herz LLP 3Abbey Spanier Rodd Abrams & Paradis LLP 2Hagens Berman Sobbel Sharpiro LLP 2 IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 10
  11. 11. Credit Crisis Class Actions Where Auditors Named (by number of cases from 2007 to May 2009)# Cases Filed: 179# Auditors Presently Named: 6 (9 cases) Accounting Firm CasesKPMG 2PricewaterhouseCoopers 1Deloitte 1Ernst & Young 1BDO 0Grant 4Regional 1 IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 11
  12. 12. Credit Crisis Top 5 Securities Class Action Plaintiff Law Firms (by number of cases from 2007 to May 2009) # Cases Filed: 179 # Auditors Presently Named: 6 (9 cases) Plaintiff Law Firm Cases Coughlin Stoia Geller Rudman & Robbins LLP 65 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 6Note: Some cases may involve more than one plaintiff, each with separate representation, and thus more than one lawfirm may be counted in a single case. Not shown above are the following law firms: 4 firms with 5 cases, 4 firms with 4cases; 5 firms with 3 cases; 18 firms with 2 cases; and 85 firms with 1 case. For a complete list contact AuditAnalytics, a division of the IVES Group. IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 12
  13. 13. Federal Securities Class Action Litigation Summary Big 4 Auditors Number of Claims Filed Public Accounting Firm 2000 2001 2002 2003 2004 2005 2006 2007 2008Deloitte LLP 11 8 9 14 4 4 3 6 6Ernst & Young LLP 6 5 13 18 10 4 20 1 7KPMG LLP 8 5 14 9 14 6 6 5 6PricewaterhouseCoopers 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 21Note: The year displayed represents the year the action was filed with the court. IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 13
  14. 14. Federal Securities Class Action Litigation Summary National Firm Auditors Number of Claims Filed Public Accounting Firm 2000 2001 2002 2003 2004 2005 2006 2007 2008Grant Thornton LLP 2 2 0 2 2 8 3 4 1BDO Seidman LLP 0 0 2 6 1 3 1 5 4McGladrey & Pullen LLP 0 0 0 1 0 1 2 0 0Crowe 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 5Note: 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. IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 14
  15. 15. Federal Securities Class Action Litigation Summary Top Twelve Regional Tier Auditors Number of Claims Filed Public Accounting Firm 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 0Note: The year displayed represents the year the action was filed with the court. IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 15
  16. 16. Top 15 Securities Class Action Defense Law Firms Representing the Big 4 (by number of cases from 2000 to May 2009) Defense Law Firm Cases Mayer 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 5Note: Some cases may involve more than one Big 4 defendant. A total of 136 law firms represented the Big 4from 2000 to May 2009. For a complete list contact Audit Analytics, a division of the IVES Group IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 16
  17. 17. Quality of Financial Reporting - Calendar Year 2008 hasExperienced a Second Year of Decline in Restatement Disclosures Total Restatements by Year Unique filers Restatements2008 Restatements 1800 1555 1565• 778 Unique Filers 1403 1235 1111• 869 Restatements 957 875 869 819 778 759• 30% Drop from Prior Year 579 616 647 696• Appears as if registrants are adapting to the rigorous financial reporting requirements of SOX 2001 2002 2003 2004 2005 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 17
  18. 18. Calendar Year 2008 also Experienced a Drop in the Severity ofRestatements1. Average Cumulative Impact on Net Income per Restatement (companies onAmex, NASDAQ & NYSE) Average Income Adjustment Per Restatement• Not only are the number of Average Income Adjustment Per Restatement restatements down in 2008, each of these fewer restatements has a much $0.00 smaller negative effect than in the prior two years. -$5,000,000.00 -$6,125,966.93 -$7,444,280.39 -$10,000,000.00 -$15,000,000.00 -$20,000,000.00 -$22,552,509.53 -$25,000,000.00 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 18
  19. 19. Calendar Year 2008 also Experienced a Drop in the Severity ofRestatements (continued)2. No Impact on Income (companies on Amex, NASDAQ & NYSE)• In 2008, a Total of 99 out of Percentage of Restatements with No Impact on Income 296 Restatements had No Restatements with no Impact on Income Impact on the Income Statement. 33.18% 33.45% 29.57% 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 19
  20. 20. Calendar Year 2008 also Experienced a Drop in the Severity ofRestatements (continued)3. Average Number of Days Restated• The Average Restatement Average Restatement Period per Year Period Peaked in 2005 Average Number of Days Restated• The Time Period Dropped 747 718 in 2006 and again in 2007 621 646 573 and 2008 537 479 466 2001 2002 2003 2004 2005 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 20
  21. 21. Calendar Year 2008 also Experienced a Drop in the Severity ofRestatements (continued)4. Average Number of Issues per Restatement• A Taxonomy of Over 50 Issues Monitored and Graded Average Issues per Restatement Average Number of Issues per Restatement• In 2008, the Average Restatement 2.43 Implicated only 1.66 Financial 2.12 2.13 2.19 2.00 2.01 1.90 Accounting Issues 1.66• Lower than the Prior 7 Years 2001 2002 2003 2004 2005 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 21
  22. 22. The Top 7 Issues have been Common over the Last 8 Years, butCash Flow (SFAS 95) has Steadily Increased to Take the 3rd SpotTop Restatement Issues between 2001 and 2008 30.00% Percent of Restatements Citing Issue Debt, quasi-debt, warrants & equity ( BCF) security issues 25.00% Expense (payroll, SGA, other) recording issues 20.00% Cash flow statement (SFAS 95) classification errors 15.00% Deferred, stock-based and/or executive comp issues Acquisitions, mergers, disposals, re 10.00% -org accounting issues Revenue recognition issues 5.00% Tax expense/benefit/deferral/other (FAS 109) issues 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 22
  23. 23. Going Concerns (Number of Auditor Opinions Qualified with a Going Concern Assumption) 25.0% 22.1% 20.9% 20.0% 19.2% 18.5% 18.4% 16.8% 16.9% 15.9% 15.0% 15.0% 10.0% 5.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008* Number of Going Concern Auditor OpinionsNote: The research above is based on SEC filings as of May 27, 2009 (an Audit Opinion database download of May29, 2009). Therefore, the 2008 percentage is a prediction based about 95% of the expected audit opinions for the 2008year end. Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 23
  24. 24. Going Concerns (Number of Auditor Opinions Uncertain of its Going Concern Assumption) Number of Going Concern Auditor Opinions 3500 3293 3304 3065 2901 2924 3000 2805 2747 2617 2600 2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008*Note: The research above is based on SEC filings as of May 27, 2009 (an Audit Opinion database download of May29, 2009). Therefore, the 2008 percentage is a prediction based about 95% of the expected audit opinions for the 2008year end. Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 24
  25. 25. Going Concerns As a Percentage of Total Auditor Opinions 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%Note: The research above is based on SEC filings as of May 27, 2009 (an Audit Opinion database download of May29, 2009). Therefore, the 2008 percentage is a prediction based about 95% of the expected audit opinions for the 2008year end. Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 25
  26. 26. Going Concern Percentages (Breakdown by Market Status) Total NYSE Nasdaq Amex OTCBB Non-Tickered Going Concerns Going Going Going Going Going % % % % % Concerns Concerns Concerns Concerns Concerns 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%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 2008year end. Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 26
  27. 27. Audit Complexity and Diffusion of StandardsExample: SEC Comment Letters Communications Equipment Industry Securities Regulations Referred to: 135 Accounting Standards Referred to: 210 Other Requirements Referred to: 45 Source: AuditAnalytics.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 27
  28. 28. 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 Information Know who is auditing whom, their fees, auditor changes, auditor opinions and more. Sarbanes-Oxley Disclosures Track Section 404 internal control disclosures and Section 302 disclosure controls. Financial Restatements and SEC Comment Letters Identify 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 Disclosures Search all federal litigation by auditor, company and litigation type. Know who is representing whom. Corporate Governance Track director & officer changes, audit committee members, C-level executives and their 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 jsmillie@ivesinc.com IVES Group Inc. phone: (508) 476-7007 e-mail: info@auditanalytics.com 28
  29. 29. Accountants Professional Liability Scorecards and Commentary Supporting Schedules July 9-10, 2009 21st Annual ALI-ABA - Accountants’ Liability Conference

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