Auditor Anxiety Spreads

Here's a tidbit I'd like to pass along in between shifts helping Darth Vader build the Death Star: Francine McKenna wrote a column for Forbes yesterday that discussed a story published on Tuesday in The Legal Intelligencer and written by attorneys Dianne S. Wainwright and Jonathan S. Ziss, that's entitled "FDIC Professional Liability Group Set To Pursue Audit Firms." The story, and Francine's column, since she interviewed the authors for additional insights, contain a good discussion of potential liability claims by the FDIC against auditors and potential defenses to those claims. Toward the end of the Intelligencer story are these interesting facts about the carnage that might be in the offing for more than just auditors. As of Dec. 14, 2010, the FDIC has authorized suits against 109 individuals for D&O liability with damage claims of approximately $2.5 billion. This includes two filed D&O lawsuits naming 15 individuals. The FDIC also has authorized four fidelity bond and attorney malpractice lawsuits. The FDIC has not, as of mid-December, authorized suit against any audit firms based on violations of the standard of care. But that is neither to suggest nor to predict that such cases are not coming. According to sources in the professional liability insurance and professional liability defense communities, in a good number of bank failures the FDIC has established a fulsome dialogue with the former auditors. This is typically centered around the auditors' work papers, whether produced informally or in response to a subpoena. There is, therefore, reason to conclude that this particular litigation pot is first coming to a boil. Look for claims in districts most rife with failed banks, such as Florida (42 failed banks since 2008) and Georgia (51), as opposed to, say, Pennsylvania (three). As receiver, the FDIC has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed. Given this limitations period, this story is long from over. As Ziss told Francine, the FDIC will likely sue first in cases where the facts are most favorable for reaching a judgment (or settlement) that is beneficial to the FDIC and where the losses allegedly caused by the auditors' acts or missions are substantial. In other words, it's always best to first pick the low-hanging fruit to send a message to people who might have more formidable defenses that the FDIC means business, so you might as well pony up and avoid as much pain as possible. That's a smart strategy. Francine closes her column with a quote from some know-nothing shyster from the sticks that, surprisingly, makes sense to me, even two days later. Kevin Funnell a lawyer with the Dallas office of Bieging Shapiro & Burrus LLP and the author the Bank Lawyer's Blog also thinks auditor anxiety is warranted. "The fact that the FDIC is gearing up to go after auditors should be a red flag to 

all professionals, including attorneys and appraisers, who represented or worked for banks that fail." According to Ziss and Wainright, attorneys should already be afraid, since the FDIC has authorized some malpractice lasuits against failed banks' legal counsel and has not yet authorized suits against auditors. Therefore, it's not just "auditor anxiety" that I think is justified, it's "bank professional service provider anxiety." This is only the opening quarter of a ball game that could become very nasty and paranoia may be warranted. In fact, as William Burroughs once observed, "Sometimes paranoia's just having all the facts."

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