Settlement of
litigation with the auditors was both predictable and inevitable.

When announced in
May 2012 that Rita Crundwell, long-serving controller for Dixon Illinois, had
managed over twenty-two years to swipe $ 53 million of city funds from under the blind
eyes of the town’s governing fathers, I wrote
that “a nightmare of auditor litigation was inevitable…”

I also wrote —
riffing on Crundwell’s diversions that underwrote her luxurious, not to say,
bizarrely ostentatious, quarter-horse hobby – that “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.”

Now, under a $ 40 million package of settlements reported last week, the City is to receive $ 1 million from the
sole practitioner signing its audit reports since 2006 – a nice round number
suggesting immediate capitulation by his malpractice insurer – and an all-in $ 35.15
million from the Midwestern firm CliftonLarsonAllen, providers of services that
were – perhaps to its hindsight remorse – supposedly limited to theoretically
low-risk compilation work.

The outward vision
of piety expressed by Clifton’s chief executive, Gordon Viere — “The right
thing to do is reduce the harm experienced by the taxpayers of Dixon and put
this matter behind us” – may to some degree soothe the pain this amercement will
inflict on his partners.

Pragmatism figured
large, however.

As I had calculated,
using the consultants’ model I have applied for years to estimate the litigation
impact that would disintegrate a large accounting network, a "worst case" result
on a $ 53 million claim would have threatened the Clifton firm’s very
survival – a collapse not unlike the litigation-driven bankruptcy of the
mid-sized Laventhol & Horwath in 1990.

So, as I put it in
anticipation of Viere’s predictable surrender:

“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.”

There are two
larger lessons in these sums, for those concerned about the viability of the private
accounting partnerships’ franchise to provide financial information assurance.

First, as I wrote
when the Dixon fraud first broke, compilation services are a miserable bargain:

“The
accounting profession, mistakenly relying on disclosure of the limits on what a
compilation report does or does not say, has traditionally looked on that 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?” 

Second, there’s an even bigger lesson
at the global scale of the Big Four. Which is that, unhappy as its break-up
would be for the Clifton firm’s partners, personnel and clients, sentimentality must yield to reality: its loss would
have no broader impact on the audit services market. 

But a similar fate for one of the Big
Four would be fatal to the entire model – a Big Three system being unarguably
unsustainable. 

I have in the works, and will shortly
offer here, an update to my November 2011 calculation
of the Big Four firms’ shockingly small break-up thresholds.

Until that is ready, it suffices to
note that Deloitte’s US firm faces an ostensibly “hard” trial date next month
on claims by the bankruptcy trustee of fraudulent mortgage lender Taylor Bean
& Whitaker, where there is more than $ 7 billion at stake – a nightmare number large
enough by several multiples to reduce that firm to rubble.

For failure to lock the barn, in other
words, the wild horses loosed by Rita Crundwell’s unbridled rapacity are still
on the roam. 

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