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It’s not always easy being a Big Five accounting firm auditor. Often dispatched to remote locations, SWAT-team style, camping out for weeks in rooms jammed with documents, they sift through mountains of financial statements, receipts, and expense reports. And all the while, their hosts eye them suspiciously, wondering if their jobs will go on the chopping block or their companies will be embarrassed because of something the auditors find. Imagine, then, how it must be for an outside auditor who audits the auditors. That was the scenario underlying a recent, aborted trial in Camden, N.J. KPMG Peat Marwick had been called in to assess the auditing prowess of one of its Big Five accounting firm brethren, Deloitte & Touche, following the discovery of embezzlement by a bank’s longtime employee. The first draft of the KPMG report allegedly said that Deloitte should have spotted the embezzlement. But before this critical assessment could be issued, the suit claimed, a phone call from Deloitte’s general counsel to KPMG’s GC resulted in a watered-down final report. This issue, and the greater question of accounting firm liability, was at the center of the lawsuit. But Deloitte, the auditee, dodged the bullet. A New Jersey trial judge on October 23 dismissed the suit against the accounting firm by Roger Ham, an accountant for rival KPMG. (KPMG maintained that Ham was fired for cause; they eventually arbitrated and settled their dispute.) Ham’s case against Deloitte broached some sensitive issues, among them whether the Big Five are able to audit each other honestly when they all belong to the same professional liability insurance pool. A peer review that results in a large damage award against one accounting firm is likely to result in higher insurance costs for all. Critics have long claimed these firms are not independent enough for clients to depend on them to evaluate each other’s performance candidly. The Ham suit stems from a decade-old criminal fraud case involving Eugene Unger, a security officer and vice president of Fidelity Mutual Savings & Loan Association in Westmont, N.J., who was sentenced to four years in prison in 1991 for embezzling $6 million from the bank during the course of almost 10 years. The criminal case — and the question of how Unger managed to hide his thefts from the bank and its clients for such a long time — prompted Fidelity Mutual’s officers to hire KPMG Peat Marwick to review what had happened and determine if the S&L’s auditors bore any responsibility for not detecting Unger’s embezzlement. Deloitte, according to court documents, had been Fidelity Mutual’s auditor since 1974. Enter Ham, the KPMG partner assigned to conduct the audit and review of Fidelity Mutual. According to court papers, the draft of the report he submitted to his superiors at KPMG blamed Deloitte for failing to uncover the organizational weaknesses and lack of checks and controls that allowed Unger to steal over a period of many years from the savings and loan and some of its customers without being detected. But Ham’s version never reached Fidelity Mutual’s officers. His suit says the reason was a February 27, 1991, telephone call by Deloitte GC Howard Krongard to his friend — KPMG’s GC Leonard Novello — to discuss the Fidelity Mutual case. The exact content of the call between the two general counsel is not known. Both Deloitte and KPMG in court filings deny that the call had anything to do with Unger or his report. However, the audit’s draft was reassigned to KPMG associate general counsel John Shutkin for what was described as a routine rewrite to ensure that the report met “professional standards.” Ham’s suit contended that the rewriting turned the report into a “whitewash” of Deloitte’s responsibility for the Unger embezzlement. Ham was fired in 1992. KPMG says it was because of a chronic drinking problem and low productivity, not his report and the Krongard-Novello telephone call. In one 1998 pleading, Deloitte’s attorney, Joseph Kenney, of Cherry Hill’s Kenney & Kenney, called Ham’s claims “preposterous” and described the contact between Krongard and Novello as “a single innocuous telephone call in which only a passing reference to the plaintiff was made.” Kenney argued that Ham was nothing more than “a disgruntled former partner of KPMG Peat Marwick who was voted out of KPMG.” The judge in the case, John Fratto, in rejecting Ham’s contentions, found that the chain of circumstantial evidence upon which Ham’s case against Deloitte was based (mainly a memorandum from KPMG’s Novello to Shutkin that said in part that Deloitte officials blamed Ham for costing it the contract with Fidelity Mutual) was not enough to allow the trial to continue to a verdict. Fratto did not write an opinion explaining his decision. But Robert Holston, Ham’s attorney, says: “The judge ruled that the admissible circumstantial evidence did not meet the burden of proof. It’s disappointing for both of us.” Holston, a partner at Woodbury, N.J.’s Holston, MacDonald and Uzdavinis, says he and Ham haven’t decided whether to appeal. Holston declines to comment on the larger issues raised by the case: “I think I’ll leave that up to the academics and observers to analyze.” A spokeswoman for Deloitte at its headquarters in Wilton, Conn., could not be reached for comment. Ham now has his own consulting firm, Ham & Co., based in his home in Wallingford, Pa., specializing in litigation support on accounting and finance issues. And no outsider will ever be sure just what that phone call between the GCs was about. Joseph A. Slobodzian is a legal affairs reporter for The Philadelphia Inquirer.

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