Big Four Look to Limit Liability

Waivers of punitive damages and jury-trial rights are quietly finding their way into audit contracts.
Stephen TaubDecember 13, 2005

PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG are trying to minimize their exposure to liability lawsuits by requiring companies they audit to limit their right to sue, reported Bloomberg.

According to the wire service, waivers of punitive damages and jury-trial rights are quietly finding their way into Big Four audit contracts — and attracting criticism from watchdogs who feel that liability caps will make accountants less vigilant. As a result, Bloomberg pointed out, five U.S. banking agencies are preparing to bar large banks from agreeing to these clauses.

The wire service noted that auditor-independence rules of the Securities and Exchange Commission, though they prohibit companies from indemnifying their auditors in civil suits, do not specifically address waivers.

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“If there are liability caps on corporations, why shouldn’t there be liability caps on shareholders?” said Lynn Turner, former chief accountant for the Securities and Exchange Commission and currently managing director of research for proxy advisory firm Glass Lewis, according to the report. “That will be next.”

Indeed, Herbert Milstein, a securities lawyer at Cohen, Milstein, Hausfeld & Toll, told Bloomberg that the contract waivers also apply to derivative suits filed by shareholders, as well as to trustees who take over a company in bankruptcy.

Ernst & Young spokesman Ken Kerrigan told the wire service, “It is important to note that these clauses do not in any way relate to an investor’s ability to seek damages.” Said Pricewaterhouse spokesman Steven Silber, “We believe our engagement letters comply with applicable rules.” Spokesmen for Deloitte and KPMG declined to comment.

“These provisions are in the self-interest of the accounting industry, but they are very much not in the interest of shareholders,” countered Michael Garland, an investment official at the AFL-CIO, according to Bloomberg. “They are in conflict with the spirit, if not the letter, of existing auditor-independence regulation.”

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