Recent Cases Have Big Impact on Auditor Liability

Source: The CPA Journal

In this article, author Sandra S. Benson reviews several recent court decisions that, for CPA firms named in accounting fraud suits, can make the difference between an early exit and potentially firm-destroying litigation. These cases involve the defense of in pari delecto, which stems from the policy that “a court should not intercede between two wrongdoers.”

In accounting fraud cases, the rationale for the defense is that a corporation – or shareholders acting on its behalf – should not be permitted to sue an audit firm for the wrongful acts of senior management, which are imputed to the corporation. The defense is available to an audit firm regardless of its negligence and, in theory, even if the firm colluded in the fraud (provided the corporation was at least equally culpable).

Benson discusses the arguments in favor of, and opposed to, the in pari delecto defense for auditors. She also analyzes recent court decisions in several jurisdictions that have reached very different conclusions. Some courts permit auditors to assert the defense, even if they colluded in the fraud. Some have rejected the defense when asserted against “innocent shareholders” – that is, shareholders who did not engage in fraud, who had no reason to be aware of the fraud, and whose stock holdings did not give them the ability to oversee corporate operations. In other courts, the defense is generally permitted but is unavailable to auditors who did not act “in good faith.”

For the complete article, read “Shielding the Auditor From Corporate Fraud Liability.”

From The CPA Journal, A Publication of the New York State Society of CPAs, April 2012, www.cpajournal.com.