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ALI-ABA Course of Study
Accountants' Liability:
Litigation and Issues in the Financial Crisis
July 8 - 9, 2010
Boston, Massachusetts
TABLE OF CONTENTS
Page
PROGRAM xi
FACULTY PARTICIPANTS xv
STUDY MATERIALS
1. Introduction and Overview
By Richard P. Swanson
1
2. Theories of Liability
By Richard P. Swanson
21
Table of Contents 23
Study Material 25
3. International Financial Reporting Standards (IFRSs)
By James J. Leisenring
75
4.
Excerpt from Report of Anton R. Valukas, Examiner, In re Lehman Brothers
Holdings, Inc.
Submitted by Robert L. Byman
87
5.
Excerpt from Final Report of Michael J. Missal, Bankruptcy Court
Examiner, In re New Century Financial TRS Holdings, Inc.
By Michael J. Missal
109
6. Recent Work of the Public Company Accounting Oversight Board
By Daniel L. Goelzer and Claudius B. Modesti
199
Table of Contents 201
Study Material 203
7.
Statement of Daniel L. Goelzer Regarding Pending Proposals and
Emerging Issues before U.S. House of Representatives Subcommittee at
Hearing on Accounting and Auditing Standards
By Daniel L. Goelzer
249
Study Material 251
Appendix A: Standing Advisory Group Meeting: OCA Current
Standard-Setting Agenda
266
8. Accountants’ Litigation Involving Smaller Firms
By John H. Eickemeyer and Ronald S. Herzog
277
9.
Accountants’ Liability: Litigation and Issues in the Financial Crisis —
Plaintiffs' Perspectives
By Robert S. Loigman and Sascha N. Rand
289
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10.
Defending Auditor Liability Cases: Clarifying the Limited Role of the
Auditor
By Christian M. Hoffman and Mathew C. Baltay
303
11.
Class Action Suits, Auditor Liability, and the Effect of the Private
Securities Litigation Reform Act of 1995
By Sanford P. Dumain
325
12.
Opposing Class Certification in Federal Securities Claims Against
Auditors
By Caryn Jacobs and Andrew J. Morris
363
Table of Contents 365
Study Material 367
13.
The SEC and the Profession: “Dear CFO” Letters as a Gauge of Current
SEC Concerns
By Christian J. Mixter
387
14. Accountants’ Liability: Regulatory Update
By Walter G. Ricciardi and Neil Lieberman
393
15.
Overview of Key Defenses Available in a Section 11 Claim Against an
Auditor
By Maureen Aidasana and Kenneth R. Cunningham
401
16. Accountants Professional Liability: Scorecards and Commentary
By Mark L. Cheffers and Robert J. Kueppers
415
17. Practice Problems
By Scott M. Univer
435
18.
Different Accounting Standards and Principles: Are We
Ready?-REVISED
By Vincent J. Love and John H. Eickemeyer
447
Study Material 449
Appendix A: Commission Statement in Support of Convergence and
Global Accounting
464
Appendix B: Private Company Financial Reporting 486
19. Recent SEC and PCAOB Administrative Proceedings Against Auditors
By Scott B. Schreiber and Arthur Luk
519
20.
Handling an SEC or PCAOB Investigation
By James D. Goldsmith, Barrie Rosenberg Prinz, Scott B. Schreiber, and
Christopher M. Cutler
531
21. Trustee Actions, the In Pari Delicto Defense and Deepening Insolvency
By Veronica E. Rendon, Amelia Toy Rudolph, and Elizabeth V. Tanis
539
22.
Invoking In Pari Delicto to Bar Accountant Liability Actions Brought by
Trustees and Receivers
By Amelia Toy Rudolph
547
Table of Contents 548
Study Material 549
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23.
Emerging Issues in Deepening Insolvency: Causation and Pitfalls of
Measuring Damages as the Debtor’s Liabilities
By Elizabeth V. Tanis and Jennifer D. Fease
605
Table of Contents 606
Study Material 607
24. Class Certification in Securities Class Actions-supplemental material
By Caryn L. Jacobs and Andrew J. Morris
635
25.
The Credit Crisis: How it Plays Out in Decisions and Economic Analysis
of Causation-supplemental material
By Lynda S. Borucki, Ph.D.
661
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ALI-ABA Course of Study Accountants' Liability:
Litigation and Issues in the Financial Crisis
July 8-9, 2010 Boston, Massachusetts
PROGRAM Thursday, July 8, 2010 7:30 a.m. Registration and Continental Breakfast 8:25 a.m. Welcome and Announcements – ALI-ABA Staff Webcast Segment A 8:30 a.m. Introduction – Messrs. Eickemeyer and Swanson 8:45 a.m. Current Developments and Course Overview – Mr. Swanson
Public perception of the accounting profession after Enron was low and was just starting to recover when the subprime and credit crisis hit. The recent Lehman report raises new questions about the quality of auditing and financial reporting. The magnitude of the “expectations gap” is again at an all-time high. Financial market regulatory reforms arising out of the credit crisis will affect the accounting profession going forward. Sarbanes-Oxley continues to impact every aspect of the profession, including firm structure, quality control, concentration and perceptions of risk, relationships with clients, and interaction with audit committees. Litigation against accountants continues at high levels. Internationalization and convergence of accounting standards is proceeding at a rapid pace, which will also have litigation implications. All these matters are reviewed and considered.
9:30 a.m. Keynote Address – Mr. Leisenring A member of the International Accounting Standards Board addresses the transition from GAAP to IFRS and other issues arising from the internationalization of accounting standards.
10:15 a.m. Networking and Refreshment Break 10:30 a.m. Subprime and Credit Crisis Issues – Messrs. Byman and Morley and Ms. Rendon
The subprime and credit crises have produced claims against accounting firms, at times in staggering amounts. The examiner’s report in the Lehman bankruptcy has generated tremendous controversy. These historic economic conditions raise unique accounting, auditing, and litigation issues which are still emerging. FAS 140, 157 and 159, “mark to market,” loan loss reserves, and other relevant accounting and auditing standards are considered, along with current litigations and their exposures.
11:15 a.m. The PCAOB’s Concerns – Messrs. Goelzer and Modesti A member of the PCAOB and its director of enforcement address the PCAOB’s concerns, including formulation of auditing standards, 404 control reports, inspections and reports, and professional discipline and enforcement.
12:00 noon Madoff Update – Mr. Hubbell Bernard Madoff and other Ponzi scheme cases have snared accountants and raise unique issues which are ongoing. This segment updates activity in the litigation.
12:45 p.m. Lunch Break
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Webcast Segment B 2:00 p.m. Accountants’ Litigation Involving Smaller Firms – Messrs. Eickemeyer and
Herzog Not all accountants’ litigation is against the Big 4 or other large firms. Claims
against smaller firms are less likely to be securities class action claims and more likely to be brought by lending banks or trade creditors. Common issues include services other than audits, poor quality workpapers, privity, unsophisticated accountants who may be poor witnesses, and tax claims.
2:45 p.m. Litigating an Accountants’ Liability Case: A Plaintiff’s Perspective – Messrs. Loigman and Rand
Two noted plaintiffs’ counsel in accounting cases share their views. 3:30 p.m. Networking and Refreshment Break 3:45 p.m. Litigating and Trying an Accountants’ Liability Cas e – Messrs. Hoffman and
Hubbell Three practitioners offer tips on litigating an accountants’ liability case, including tips on motion practice, discovery strategies for accessing firm manuals and personnel files, electronic discovery, development of trial themes, experts, motions in limine, witness selection and preparation, keeping the jury’s interest, use of technology, opening statements, and summation.
4:15 p.m. Class Actions – Mr. Dumain Statistics show continued growth in securities class action litigation, yet recent case decisions place new hurdles to class certification, including requiring evidentiary showings of actual class-wide causation. Pleading fraud with particularity is also a hurdle. These and other matters are considered.
4:45 p.m. Opposing Class Certification – Ms. Jacobs and Mr. Morris Opposition to class certification is a new and often fruitful ground for defending class actions. Typically, preponderance and other Rule 23 issues are challenged, and loss causation has been an area of contention as well. Mini-trials and intermediate appellate review under Rule 23(f) can result.
5:15 p.m. The SEC and the Profession – Messrs. Cadigan, Mejia, Mixter, and Ricciardi The SEC’s enforcement docket on accounting matters continues to be heavy. Current enforcement initiatives and trends are discussed. Topics include the current controversy over “fair value” and “mark to market”, FAS 140 and 157 and the future of “fair value” accounting after the financial crisis, IFRS and convergence, restatements, SAB 99 and other pronouncements on materiality, SAB 101 on revenue recognition, and earnings management.
6:15 p.m. Adjournment for the Day; Networking Reception for Registrants and Faculty, Hosted by:
• Arnold & Porter LLP • Vedder Price P.C.
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Friday, July 9, 2010 7:30 a.m. Networking Session and Continental Breakfast Webcast Segment C 8:00 a.m. Handling an SEC or PCAOB Investigation – Ms. Prinz and Messrs. Cutler,
Goldsmith, Scheck, and Schreiber Representing an accountant in an SEC or PCAOB investigation calls for different skills and tactics than private litigation, in part because your adversary can also be the judge, jury, and executioner. Three practitioners discuss how to handle these investigations.
9:00 a.m. Section 11 Claims – Ms. Coberly and Mr. Cunningham As the PSLRA and the Supreme Court’s decisions in Twombly and Iqbal make it harder for Rule 10b-5 class actions to make it past a motion to dismiss, plaintiffs have placed more emphasis on Section 11 claims, which raise unique issues and defenses.
9:30 a.m. Developments on the Horizon – Messrs. Cheffers and Kueppers As if the changes in the decade after Sarbanes-Oxley were not enough, the next few years after the credit crunch are likely to see even more changes in accounting firm structure and regulation. Can only four firms effectively audit most public companies? What is the future of firm structure given the virtual collapse of major financial institutions, ongoing restatements, control deficiencies, and SEC proceedings and settlements? What will new financial regulators require? What other issues can the profession expect to face?
10:15 a.m. Networking and Refreshment Break 10:30 a.m. Practice Problems – Ms. Crockett and Mr. Univer
Several recurrent practice problems can generate liability exposure and must be appropriately managed. These include comfort letters, consents, 10A issues and investigations, restatements, management integrity, withdrawal of opinions, and resignation. They often arise in a tense crisis atmosphere and must be addressed quickly.
11:15 a.m. International Financial Reporting Standards – Messrs. Eickemeyer and Love The SEC is pushing towards convergence of financial reporting standards, and the winner appears to be IFRS, not GAAP. IFRS is a more principles-based system, which will have litigation implications. Understanding how IFRS differs from GAAP is therefore important.
11:45 a.m. International Problems – speaker to be confirmed Accountants’ litigation increasingly has cross-border aspects. The ability of the SEC to access foreign firm workpapers and cross-border subpoenas, regulatory standards, enforcement, and discipline all raise issues which practitioners must address. Plaintiffs’ efforts to “pierce the veil” to sue international accounting entities are also considered.
12:30 p.m. The Continuing Impact of Sarbanes-Oxley on Large Firm Litigation – Mr. Finnegan This panel discusses the current litigation and regulatory topics affecting the larger firms. Subjects considered include Sarbanes-Oxley, CEO and CFO certification, internal control reports, auditor rotation, foreign registration and regulation, work paper standards and retention, new auditing standards, international accounting standards, consulting, limitations on accounting services, and liability limitations.
1:00 p.m. Lunch Break
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Webcast Segment D 2:15 p.m. Trustee Actions, the In Pari Delicto Defense, and Deepening Insolvency – Mss.
Rendon, Rudolph, and Tanis As class actions have declined, they have been replaced by trustee actions. This
past year has seen substantial case law developments regarding the in pari delicto defense and the related doctrine of deepening insolvency in cases brought by receivers and trustees against accountants.
3:15 p.m. Networking and Refreshment Break 3:30 p.m. Damages and Causation – Ms. Borucki
The Supreme Court’s decision in Dura Pharmaceuticals and other recent developments have placed new emphasis on theories of damages and causation in accountants’ liability cases. Damage causation can even be an important class certification issue. It is therefore more important than ever to have a well-founded damages theory — legally, factually and statistically — or be able to attack the plaintiff’s theory.
4:00 p.m. Ethical Considerations – Messrs. Eickemeyer and Swanson This segment addresses ethical issues arising from the three-way relationship among the insurer, the accountant, and defense counsel; internal investigations; multiple representation; and former employees. Ethical issues involving the attorney-client, accountant-client, and work-product privileges are also considered.
5:00 p.m. Adjournment
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ALI-ABA Course of Study Accountants' Liability:
Litigation and Issues in the Financial Crisis
July 8-9, 2010 Boston, Massachusetts
PLANNING CHAIRS
John H. Eickemeyer, Esquire Vedder Price P.C. Suite 4700 1633 Broadway New York, NY 10019
Richard P. Swanson, Esquire Arnold & Porter LLP 399 Park Avenue New York, NY 10022
FACULTY Lynda S. Borucki, Ph.D. Principal The Brattle Group, Inc. 44 Brattle Street Cambridge, MA 02138 Robert L. Byman, Esquire Jenner & Block LLP 353 N. Clark Street Chicago, IL 60654-3456 Luke T. Cadigan, Esquire Assistant Regional Director U.S. Securities and Exchange Commission 23rd Floor 33 Arch Street Boston, MA 02110 Mark L. Cheffers, CPA, ABV Chief Executive Officer Audit Analytics, Inc. Suite 2F 9 Main Street Sutton, MA 01590 Linda T. Coberly, Esquire Winston & Strawn LLP 35 W. Wacker Drive Chicago, IL 60601-9703
Ms. Julie B. Crockett PricewaterhouseCoopers LLP Suite 2100 300 Madison Avenue New York, NY 10017 Kenneth R. Cunningham, Esquire Associate General Counsel Grant Thornton LLP Suite 2000 175 West Jackson Boulevard Chicago, IL 60604 Christopher M. Cutler, Esquire McGuireWoods LLP Suite 1200 1050 Connecticut Avenue, NW Washington, D.C. 20036-5317 Sanford P. Dumain, Esquire Milberg LLP Suite 4900 One Pennsylvania Plaza New York, NY 10119 Thomas M. Finnegan, Esquire Associate General Counsel PricewaterhouseCoopers LLP Suite 2100 300 Madison Avenue New York, NY 10017
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Daniel L. Goelzer, Esquire Acting Chairman Public Company Accounting Oversight Board Suite 800 1666 K Street, NW Washington, DC 20006 James D. Goldsmith, Esquire Associate General Counsel KPMG LLP Suite 1100 757 Third Avenue New York, NY 10017 Ronald S. Herzog, Esquire Snow Becker Krauss P.C. Suite 2500 605 Third Avenue New York, NY 10158 Christian M. Hoffman, Esquire Foley Hoag LLP Seaport West 155 Seaport Boulevard Boston, MA 02210 Robert B. Hubbell, Esquire Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Caryn Jacobs, Esquire Mayer Brown LLP 71 S. Wacker Drive Chicago, Il 60606 Mr. Robert J. Kueppers Deputy CEO Deloitte LLP 1633 Broadway New York, NY 10019 Mr. James J. Leisenring Member International Accounting Standards Board 401 Merritt 7 Norwalk, CT 06856
Robert S. Loigman, Esquire Quinn Emanuel Urquhart & Sullivan, LLP 51 Madison Avenue New York, NY 10010 Vincent J. Love, CPA Managing Director Finance Scholars Group Suite 1800 675 Third Avenue New York, NY 10017 Luis R. Mejia, Esquire DLA Piper LLP 500 Eighth Street, NW Washington, DC 20004 Christian J. Mixter, Esquire Morgan, Lewis & Bockius LLP 1111 Pennsylvania Avenue, NW Washington, DC 20004 Claudius B. Modesti, Esquire Director of Enforcement and Investigations Public Company Accounting Oversight Board Suite 900 1666 K Street, NW Washington, DC 20006 Matt T. Morley, Esquire K&L Gates LLP Suite 200 1601 K Street, NW Washington, DC 20006 Andrew J. Morris, Esquire Carr Maloney P.C. Suite 500 1615 L Street, NW Washington, DC 20036 Barrie Rosenberg Prinz, Esquire Associate General Counsel Office of General Counsel Deloitte LLP 1633 Broadway New York, NY 10019
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Sascha N. Rand, Esquire Quinn Emanuel Urquhart & Sullivan, LLP Suite 2200 51 Madison Avenue New York, NY 10010 Veronica E. Rendon, Esquire Arnold & Porter LLP 399 Park Avenue New York, NY 10022 Walter G. Ricciardi, Esquire Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 Amelia Toy Rudolph, Esquire Sutherland Asbill & Brennan LLP 999 Peachtree Street, NE Atlanta, GA 30309
Howard A. Scheck, Esquire Chief Accountant, Enforcement Division U. S. Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 Scott B. Schreiber, Esquire Arnold & Porter LLP 555 Twelfth Street, NW Washington, DC 20004 Elizabeth V. Tanis, Esquire King & Spalding LLP 1180 Peachtree Street, NE Atlanta, GA 30309 Scott M. Univer, Esquire General Counsel WeiserMazars LLP 135 West 50th Street New York, NY 10020
Please go to www.ali-aba.org/cs009 for biographical information about this faculty
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