On paper, Miniscribe certainly looked like a highflyer. The Colorado-based company's financial statements in the mid-1980s painted it as a vigorous, healthy computer-parts maker with a bright future. But an internal investigation drew quite a different picture. The probe uncovered massive fraud by senior managers, who shipped boxes of bricks labeled as disk drives and counted them as sales. Investigators blamed executives for the company's cooked books, but bondholders also sued Miniscribe's auditors, Coopers & Lybrand, for conducting faulty audits. In February a jury stunned the accounting profession by ordering C&L to pay damages of $200 million. It was the largest judgment ever levied against an accounting firm.
Coopers & Lybrand is not the only auditing firm being dragged into court these days. From the Big Six firms, which ring up a quarter of the industry's $46 billion in revenues, to the bean-size outfits that operate in storefronts and home offices, the accounting profession is facing the most serious liability crisis in its history.
All told, U.S. accountants now face 4,000 liability suits -- double the number in 1985 -- and more than $15 billion in damages. In the past year, the six largest firms alone have paid more than $300 million to settle such suits. At the same time, legal expenses and insurance rates are zooming. The financial burden is so pressing that it is driving many firms out of the riskiest lines of business and pushing others out of business altogether. Says Mark Carr, editor of Public Accounting Report, an industry newsletter: "The magnitude of the suits and the potential risks pose a great danger for even the largest firms. It's a crisis, and it's a big crisis."
Roughly two-thirds of the litigation stems from the epic savings and loan scandal. Accounting firms, along with lawyers and others, face thousands of lawsuits by investors and government regulators, including the Federal Deposit Insurance Corporation. Accountants' financial liability in S&L cases could exceed $9 billion, not counting compensatory damages. Last week Ernst & Young agreed to pay $63 million to settle claims that its negligence helped S&L honcho Charles Keating Jr. defraud some 23,000 investors in Lincoln Savings & Loan. The settlement came two weeks after the largest U.S. accounting firm, Arthur Andersen, paid $22 million for fraud claims arising from the same S&L collapse.
Accounting firms can expect to be sued in connection with many of the past decade's financial scandals. A notable example: the collapse of the Bank of Credit & Commerce International, which investigators shut down last July after it was found to be a virtual supermarket of illegal services. American firms Ernst & Young and Price Waterhouse are being investigated for their part in managing B.C.C.I.'s books; both could face suits. Coopers & Lybrand is coming under similar scrutiny for its role as auditor for the media tycoon Robert Maxwell, who apparently looted some of his companies in the months before his mysterious death at sea. Deloitte & Touche stands to be hit with hundreds of liability suits by policyholders whose investments were put at risk by the failure of Executive Life Insurance.