Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.
But others disagree, arguing that auditors might very well become the object of scrutiny, especially if they failed to report back-dating or if they tried to cover it up.
“In all of the situations, questions will be asked about the outside auditing firm, what it did and did not do, and what it did and did not know,” says Jahan Raissi, a partner with Shartsis Friese who represents board members of companies with backdating problems.
The accounting firms are expecting a close look from government regulators, said defense lawyers involved in the backdating cases, as well as from the plaintiff lawyers accustomed to naming auditors in securities fraud suits. Private and government attorneys said the SEC in particular will look closely at auditors.
But those lawyers � some of whom asked not to be identified due to the sensitivity of the ongoing backdating probes � said criminal charges, or even substantial SEC civil charges, are not likely to be brought against the accountants.
“If the government finds out that a particular practice was systemic in the accounting firm, it is possible they would bring an action against a whole firm, but usually it is a person or at team of people,” Raissi said. “The experience of Arthur Andersen has put them [the SEC] a little bit on edge about suing an entire company.”
That’s not to say accounting firms’ lawyers won’t be busy. Plaintiff attorneys have already named at least two of the Big Four accounting firms � PriceWaterhouse and KPMG � as co-defendants in civil backdating suits. And more are likely to follow.
“It’s going to be less from the perspective of regulators and prosecutors than it is from civil litigation,” said Darren Robbins, a Lerach Coughlin partner handling several backdating cases.
The prospect of auditors conducting investigations into companies’ backdating problems � while at the same time fending off plaintiff lawyers’ claims that they’re responsible for options problems � is a bit hairy for the firms. One in-house lawyer at a Big-Four accounting firm said auditors aren’t letting the prospect of liability affect their investigations of backdating issues.
“You just have to take a liability allegation on its face and deal with it,” he said. “It doesn’t affect your professional responsibility.”
Seth Aronson, a partner at O’Melveny & Myers defending Vitesse Semiconductor Corp. against backdating suits in L.A. federal court � a suit in which KPMG is a named defendant � said the auditor issue isn’t clear. “That will vary from one case to the next, but my suspicion is that the accountants will not be the primary focus,” he said.
The problem of having accounting firms as both potential defendants and as auditors investigating wrongdoing, Aronson said, has come up in other white-collar investigations. “It happens oftentimes when there’s a restatement on an accounting issue, where lawyers need to bring in forensic accountants,” he said.
Yet none of those cases have happened on such a large scale, with so many potential defendants as in the backdating suits.
In recent weeks, the accounting firms have seemed more focused on determining how to handle the backdating audits � and when to tell a company to restate earnings � than on liability. Last week, representatives of the Big Four met with the SEC’s acting chief accountant, Scott Taub, to discuss the issue.
That meeting is of great interest to defense lawyers who want to know the criteria the SEC will use to determine their clients’ exposure. It also sparked some nervousness among the defense bar, worrying lawyers that overly strict SEC guidelines will spur accounting firms to decry behavior in their investigations that other accountants may have ignored in the past.
“Nobody thought to look at it because it just didn’t matter,” said a white collar defense lawyer who asked not to be identified because he represents backdating defendants. “There were not audit procedures that were designed to make sure that the grant date was appropriate.”
