| The auditing profession faces many challenges in serving its clients profitably while concurrently facing lawsuits and increasing damage awards, reviewing the implementation of their clients’ International Financial Reporting Standards (IFRS) and extending professional judgment to additional services. Reilly (2006) notes that the European Commission (EC) found that Big-Four audit practices’ judgments, settlements, legal fees, and other related expenses rose to US$1.3 billion, or 14.2% of their revenues, up from 7.7% in 1999. Overall, from 1996 to 2008, the six largest auditing firms paid out US$5.66 billion to resolve 362 cases related to audits and other nonaudit services, with 65% related to public company audits (Advisory Committee on the Auditing Profession [ACAP], 2008). Bigticket settlements, verdicts, and judgments against accounting firms have continued in more recent years, such as the following: a settlement agreement of about US$30 million between the Metropolitan Mortgage & Securities Co. investors’ trust and PriceWaterhouseCoopers (PWC) in 2008 (Stucke, 2008); a settlement agreement between PWC and Tyco International investors for US$225 million in 2007 (International Herald Tribune; Auditing Firm Settles Claims of Tyco Investors, 2007); Deloitte & Touche settled an investor lawsuit over its audit of Philip Services for US$50 million in 2007 (Reuters, 2007); a US$85.6 million judgment against Deloitte & Touche in favor of the creditors of Livent, a theater company, in 2014 (Hasselback, 2014); and a PWC-agreed US$97.5 million settlement of a class-action securities fraud lawsuit involving American International Group in 2008 (Practical Accountant, 2008). These data represent some of the legal liability exposure that auditing firms have incurred since the beginning of 2007. According to some EC economic modeling, partners’ capital accounts of even the strongest of the Big-Four firms could absorb (only) up to US$1.8 billion of losses without collapse—and the real survival risk threshold falls below that amount (Peterson, 2007). Russell (2011) adds that liability risk threatens the profession’s viability—a problem that could prevent large audit firms from attracting the ‘‘best and brightest’’ students to the profession. Implementing the Sarbanes–Oxley (SOX) Act of 2002 and enforcing the Foreign Corrupt Practices Act have increased potential auditor liabilities (Shearman & Sterling, 2014).1 As the United States adopts principles-based professional judgment accounting standards, limiting auditor liability exposure becomes more imperative, as principle-based standards increase auditor liability risk (Quick, 2013).2 Some current, major reforms of relevant professional standards include adjusting to new U.S. Generally Accepted Accounting Principles (GAAP), moving toward IFRS, and likely requiring private firms to use a subset of accounting standards (Pearson, 2011). Lawyers and judges second guessing could well lead to more auditor litigation where fewer precise standards exist (Pearson, 2011). |