Seeking protection from financial damages, the Big Four are now including punitive damage waivers in their audit client contracts. These waivers are drawing controversy from government regulators, investors, and clients. These contracts may require disputes to go to arbitration and waive rights to punitive damages and jury-trial rights.
Bloomberg reports that the Federal Financial Institutions Examination Council is preparing to bar large banks from agreeing to these contracts as they believe these waivers may lead to less thorough audits. The Federal Financial Institutions Examination Council is made up of the Federal Reserve Board, The Federal Deposit Insurance Corporation, the National Credit Union Administration, The Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
The firms Deloitte & Touche LLP, PricewaterhouseCoopers LLP, and KPMG have varying liability provisions in their contracts. Arthur Bowman of the newsletter, Bowman FirstAlerts, said in Bloomberg, “Since they couldn’t win the litigation reform they wanted, they’ve been putting these in engagement letters.”
Herbert Milstein, a securities attorney at Cohen, Milstein, Hausfeld & Toll, said in Bloomberg that these contract waivers carry over to derivative shareholder suits and to trustees who take over companies in bankruptcy.
Lynn Turner, former chief accountant for the Securities and Exchange Commission, said in the International Herald Tribune, “If there are liability caps on corporations, why shouldn’t there be liability caps on shareholders? That will be next.” Turner is a member of the board of Sun Microsystems Inc. that disclosed its audit contract with Ernst & Young in September. They were the first company to reveal usually confidential contract provisions.
Public-employee pension funds in Florida and Ohio are among the shareholders saying that these agreements may be precursors to limit investors’ right to sue. Ernst & Young spokesman Ken Kerrigan said in Bloomberg, “It is important to note that these clauses do not in any way relate to an investor’s ability to seek damages.”
“We believe our engagement letters comply with applicable rules,” said PricewaterhouseCoopers spokesman, Steven Sliber. Bloomberg reports that KPMG spokesman Tom Fitzgerald and Deloitte & Touche spokeswoman Deborah Harrington, decline to comment.
Ernst & Young CEO James Turley, said in a speech earlier this month, “We in the profession understand and accept that there are legal liability risks inherent in the public accounting business. It goes with the territory. This is a debate about uninsurable, catastrophic risk –– in a word, sustainability.” He called on the government to protect his and other accounting firms from destructive “litigation risk.”
The cost of compliance to the Sarbanes-Oxley Act (SOX) and especially Section 404, has been extremely high this first year and several studies have forecast significant cost drops next year. On a similar track and although not confirmed, the Big Four may be feathering their own bed, as it were. The results of a new study, completed by CRA International and sponsored by the Big Four, may fit well into an attempt by the firms to ward off criticism and further regulation, according to CFO.com.
CFO.com reports that the Big Four, along with the AICPA, fought hard resisting the takeover of audit standard making by the Public Company Accounting Oversight Board (PCAOB). This suggests the Big Four continue to see the increasing flow of compliance fees. The Big Four now see SOX as a valuable tool in preventing corporate fraud and accounting scandals. Corporate clients are the only ones complaining about SOX 404 now but have been assured by the accounting firms that those costs will decrease next year. The proof will come next year.