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

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

IVES Group Inc. phone: (508) 476-7007 e-mail: [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

2

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

3


IVES Group Inc. phone: (508) 476-7007 e-mail: [email protected] 4

Source: AuditAnalytics.com

558

82

418

168

65

193245

628

0

259217

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

7



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

8



Madoff Ponzi Scheme

Securities 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 Scheme

Securities 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




Credit Crisis

Class 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




Credit Crisis

Top 5 Securities Class Action Plaintiff Law Firms


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 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 6

# Cases Filed: 179



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Federal Securities Class Action Litigation Summary

Big 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




National Firm Auditors


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




Top Twelve Regional Tier Auditors


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


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 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 5


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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

17


579647

759875

1403

1565

1111

778

616696

819

957

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

Restatements

1. Average Cumulative Impact on Net Income per Restatement (companies on

Amex, NASDAQ & NYSE)

18

• 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




Restatements (continued)

19

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





3. Average Number of Days Restated

20

• 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

573621

747 718646

479

Average Restatement Period per Year

Average Number of Days Restated





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

2.002.12 2.13 2.19

2.43

2.01 1.901.66

Average Issues per Restatement

Average 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 Spot

Top Restatement Issues between 2001 and 2008

22


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2001 2002 2003 2004 2005 2006 2007 2008

Pe

rce

nt

of

Re

sta

tem

en

ts C

itin

g Is

su

e

Debt, quasi-debt, warrants & equity ( BCF) security issues

Expense (payroll, SGA, other) recording issues

Cash flow statement (SFAS 95) classification errors

Deferred, stock-based and/or executive comp issues

Acquisitions, mergers, disposals, re-org accounting issues

Revenue recognition issues

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



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

23


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)

24




year end.

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




year end.

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)

26


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.

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

27


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 is

representing whom.

Corporate GovernanceTrack 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 [email protected]

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Accountants Professional Liability

Scorecards and Commentary

Supporting Schedules

July 9-10, 2009

21st Annual ALI-ABA - Accountants’ Liability Conference

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

Business

cases accounting firmcaseskpmg

deloitte llp

grant 0regional4ives

following law firms

pricewaterhousecoopers

public accounting firm2000

ernst young llp

global firm guarantor