News is coming in of an increasing number of class actions being brought against hedge funds and their auditors, for failing to detect the alleged frauds being perpetrated by Bernard Madoff. Within the US, apparently KPMG, Ernst & Young, PWC, McGladrey & Pullen and BDO Seidman all audited funds that were not part of Madoff's empire, but acted as feeder hedge funds with significant amounts being invested in Madoff's brokerage.
Whilst the cases will no doubt be debated on the basis of individual circumstances, the role of the auditor - and indeed the purpose of the audit - will certainly come under the spotlight once again.
This will all take time, and any judgement will, no doubt, be appealed, thereby stretching the process out even further. But with the sums involved, any final decision against one of the major firms could have very serious consequences - particularly in the context of other litigation that is bound to develop as a result of the current recession.
I have written before about the number of claims outstanding against Big 4 accounting firms, and the potential risk to the profession as a whole if just a few of these were to stick and cause the demise of one of the Big 4. News of this more recent litigation simply compounds the problem.
So are these new claims valid - or simply the acts of desperate parties trying to salvage either their fortunes, their reputations or indeed their own businesses? Jane Howard, of London law firm Reynolds Porter Chamberlain, believes that the situation smacks of 'deep pocket syndrome'. Quoted in the International Accounting Bulletin recently, she said "the auditors would be well advised to argue that it wasn't within the scope of their retainer".
I'm sure she is right - but whether the courts agree remains to be seen. Whether or not they do, we at MSI Global Alliance (www.msiglobal.org) remain convinced that the more the professions evolve, the more important it becomes for a strong mid-tier to develop to act as a real alternative to the truly global players. We are getting there - but there is a long way to go.
James Mendelssohn (jmendelssohn@msiglobal.org)
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