The auditing profession is watching closely a hearing in New York Court of Appeals this week, expecting significant implications for auditor malpractice claims.
A group of investors in the reinsurance firm American International Group are suing the company’s audit firm, PricewaterhouseCoopers, for failing to detect a long-running bid-rigging and accounting fraud scheme at AIG. PwC won a dismissal of the suit contending AIG shared blame because it was AIG employees who carried out the fraud that PwC failed to identify, a common defense for audit firms against shareholder claims.
The investor group, led by the Teachers Retirement System of Louisiana and the City of New Orleans Employees’ Retirement System, appealed the dismissal and will have their day in the New York Court of Appeals this week. A Delaware appeals court handed the case over to the New York Appeals court, saying “a resolution of this appeal depends on significant and unsettled questions of New York law.”
The investor group’s law firm, Grant & Eisenhofer, says the case is expected to settle the debate over whether shareholders can pin a malpractice claim on the audit firm when the company in which the shareholders are invested is at fault for the original offense. The appeals court is expected to help define where New York law stands on the question, the law firm said.
The hearing will consider the argument not only in the PwC case, but in other cases against KPMG and Grant Thornton as well. The American Institute of Certified Public Accountants filed a brief in support of the accounting firms, saying an abandonment of the current precedent protecting audit firms would “expand auditor liability well beyond the boundaries of established precedent and out of proportion to an auditor’s ability to detect and prevent management fraud.”
Stuart Grant, a partner with Grant & Eisenhofer, said auditors are looking for a “get-out-of-jail free card” that they can plan anytime they are sued by a client for failing to detect fraud. “But detecting that kind of fraud is exactly what the client hired them to do,” said Grant in a statement. “There needs to be some accountability.”
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