DOCTRINE REJECTED FOR DISCRETE AUDITS

NYLJ 6-8-07

2. DOCTRINE REJECTED FOR DISCRETE AUDITS


2. Do not ask for whom the bell tolls, just where and when, especially if you’re one of the Seven Sisters: the major accounting firms who audit corporate America. Arthur Anderson only heard the peals after it was on its way to dissolution. That they were much too cozy in their continuous relationship with Enron should have alerted investigators before that, but, up to then, no top rank auditor had ever been forced to pony up for their client’s defaults—or not in such a drastic extent.

Price Waterhouse Cooper LLP’s big league rep for decades, and even star power as being the ones who count the ballots and deliver “the envelope” to the Oscar podium. (Ok. So you need to tack on the Lybrand as well…but if that ain’t the seal of integrity, what is?) While the various Lipper funds (namely convertible and Fixed Income) have been high-flying arbitrageurs since the go-go ‘80s, at least from 1995 to 1999 PWC hass done the annual bookkeeping check-up. It was, in their figures, reasonable to value their assets at well over $1 billion every time. Thing is, when the funds hit a slide in 2002, as two top managers bailed with golden parachutes, the actual number was more like $400 million. This news sent a lot of limited partners scurrying for the exits and set the whole damned thing on a downward spiral to dissolution as well. The Bankruptcy trustee Williamson looked at the cooked books and concluded collusion.

It was his lawsuit under the continuous representation doctrine that brought them to task; not so much that 3-yr. Statute of Limitations could be tolled in 2004 for a last ledger in 1999, but that it was the compounding of errors that inflated assets, capital & profits—which is how you get from an H&R Block visit in early April to continuous rep. while the Manhattan Sup. Ct. could dismiss claims for all but 2000 and the 1st Dept. could reverse on the 3-2 decision, the trustee was entitled to no less than an opportunity to develop his case, it took the CoA to nail it shut.

It was a unanimous decision, just to make it more serene.

The history of the continuous representation doctrine shows its first and primary application to have been a medical malpractice, in 1962. Only 20 years later, in 1982, would it be applied to the legal profession. And, while it has since been used against engineers, architects, and surveyors, the latest is a new wrinkle, most likely as a result of the aforementioned Enron, et alia. The key here is that both sides understood and accepted that they were involved in an ongoing professional relationship. In the instant case, however, that was not present.

“The plaintiff’s allegations makes clear that the funds entered into an annual engagement with the defendants for the provision of year-end financials. Once those services were completed, no further work was undertaken. This constitutes a continuing professional relationship and not a course of representation.” The plaintiff’s attorney was quick to cop to that interp. “Auditors typically have long-lasting relationships with their audit clients, “ hanging out that representation as the sole flag of surrender, he put his best face on a worst case scenario. “As a consequence, one’s exposure for an event, no matter how old and stale…” Ah me! Not purposefully neglecting the fact that you could just as easily rule they should return the money for having utterly failed in their obstensible duties. And we, naturally, are speaking of their fiduciary duties; not the one’s they owe to Enron’s investors and employee pension funds and retirement accounts when they allowed monstrous malfeasance to go undetected, unprosecuted and unpunished.

That’s another bell-ringer altogether.