A nightmare of
auditor litigation was predictable, when the news broke last May that the
comptroller of bucolic Dixon, Illinois, had helped herself to $ 53 million
dollars of city funds (here). 

Having financed her
luxury-level hobby horses on an apparently modest five-figure city salary, revealed
as supplanted by twenty years of hand-over-fist embezzlement, Rita Crundwell
now faces twenty years of federal prison time (here).

As of December, the
town added Midwestern regional accounting firm CliftonLarsonAllen as a
litigation target (here) – liability being asserted for its multiple roles including
Crundwell’s own tax return preparer and keeper of the city ledger, as well as
auditor of the town’s financial statements until 2006 when it dialed back to
“compilation services.”

A full-out courtroom
scuffle would be interesting. On the one hand, the accountability of Dixon’s
own city fathers over the extended looting of an annual budget of only $ 8 to $
9 million implicates their guardianship of the municipal barn door through
which Crundwell cantered away with her bags of stolen loot.

But as I wrote at
the time: 

“The
accounting profession, mistakenly relying on disclosure of the limits on what a
compilation report does or does not say, has traditionally looked on
(compilation) work as low risk – which it mostly is. But consider the
environment, and the typical level and quality of competence, governance and
integrity in municipal government. What level of confidence should with safety
be routinely reposed in those entrusted with management of a small city’s
financial resources?” 

 
On the recent reporting, the Clifton firm’s reliance on the limited
duties associated with a compilation is exposed to collateral arguments about
its deeper involvement: emails continuing to refer to “audits,” alleged
working-paper support to the local sole practitioner putting his name to the
opinions, and maintenance of a steady-to-increasing stream of fees even with
the reduction in its stated scope of responsibilities. 

Limited as
compilation work requirements may be, they continue to require fulfillment of
professional standards of quality control, ethical principles of integrity,
objectivity competence and due care.

And by way of
reinforcement, commentators and standard-setters continue to press the
importance of skepticism in oversight (here and here) – difficult enough to achieve, and hostage to fortune
whenever tested under the harsh glare of hindsight.

However — those
expecting a shoot-out at the Dixon corral should prepare for a damp squib
instead — mainly because the prospect of an actual trial rather than an
out-of-court settlement is so slight.

That’s because the
Clifton firm’s exposure is life-threatening, and so unlikely to be tested in a
trial.

Which is despite
the fact that Dixon’s outside lawyers hold themselves out as personal
injury lawyers, who do not
publicize accountancy litigation as a practice area. So they are unconstrained outsiders
to the culture of the traditional accountancy plaintiffs’ bar, which has long
calibrated its high-end demands so as to wring only enough from the flock of
Big Firm geese to enrich themselves while sustaining the steady supply of
golden eggs.

Instead, using the
model on which I have previously explored the shockingly small size of a
litigation threat that would disintegrate a global-scale accounting firm (here), the Clifton firm’s reported $ 570 million of annual revenue
is a fragile base from which to defend against a worst-case impact on the order
of $ 53 million. [1]  

No management has
the fortitude, much less the confidence – except under the most extreme duress
— willingly to submit the quality of its work to a civil jury for such a
price.

Existential threats
from litigation are an unconfronted daily reality for the Big Four firms (here). But no less for their smaller brethren, where the threat is
on a “one-and-done” basis. BDO’s ability to withstand the adverse jury verdict
in the Bankest case in Florida was a fortuitous combination of persistence,
favorable court rulings and an eventual settlement – still not publicly
disclosed (here and here). And
the Baker Tilly firm’s $ 50 adverse verdict in Wisconsin in the Aqua Finance
matter – unhappily including a coverage dispute with its insurance carrier (here) – surpasses its resources on a worst-case basis as well.

None of which bodes
well for the strength, sustainability or long-term future of the assurance
function – professed to be important to society’s ability to rely on audited
financial statements.

Instead, the clock
of doom ticks toward midnight.

Thanks for joining this dialog. Please share
with friends and colleagues. Comments are welcome, and subscription sign-up is
easy and free, both at the Main
page.