(3 of 4)
The accounting profession sees itself as a scapegoat in the S&L crisis. Says J. Michael Cook, chairman of Deloitte & Touche: "The equation that an S&L failed, it had an audit, so the audit failed -- that just doesn't add up." Industry leaders complain that they are being targeted by government regulators seeking to deflect blame from their own mistakes and by investors looking for rich firms to make good their losses. "People come after the auditors because they're usually the only ones with money left standing," says Philip Chenok, president of the American Institute of Certified Public Accountants (A.I.C.P.A.).
The industry's crisis has already toppled some stalwarts. Laventhol & Horwath, the big Philadelphia-based firm, filed for bankruptcy last year after it became the target of several lawsuits stemming from its auditing and consulting work. L&H had paid more than $50 million in claims before folding. Another major failure could be imminent, some analysts believe. The average Big Six firm has total capital of nearly $3 billion, but in light of recent damage awards, even that amount could be eroded. Of the Big Six, Ernst & Young may be the most exposed because of its focus on the financial industry. The ^ New York City firm audited about one-fifth of all recently failed banks and S& Ls.
Firms are also paying the price in the form of higher legal expenses and climbing insurance rates, which together can eat up 25% of a firm's profits. The typical Big Six firm spends an average of $30 million a year to defend itself against lawsuits, twice as much as five years ago. Insurance premiums are also rising, up at least 15% last year, to about $5,300 for the average Big Six accountant. Increasingly, however, insurers are refusing to offer any coverage at all to accounting firms because the risks are too great and uncertain. Insurers have no way to measure the risks of insuring some financial-services audits because problems usually remain uncovered until several years after the audit. Where 15 firms offered audit insurance about five years ago, only three or four still do, including Crum & Forster. In response, accounting firms are abandoning the riskiest clients, most notably financial-services companies. Goldstein Golub Kessler, a midsize New York City firm with more than 1,500 clients, says it will no longer perform audit work for banks, credit unions or insurance concerns. KPMG Peat Marwick, the fourth largest accounting firm, is also turning away high-risk cases, says Michael Conway, the partner in charge of professional practices. "We're being very selective about which clients we accept."
Accountants won't be the only ones who will pay, say analysts. As large firms retreat -- the Big Six currently handle the audits of 90% of FORTUNE 500 companies -- industries that require the most careful audits could be left without accountants or with lower-quality auditors. "Financial markets could grind to a halt if auditors stop certifying books," warns Rick Telberg, editor of Accounting Today, a New York City newspaper. "Investors are not going to invest unless they see that stamp of approval."