Deloitte Feels Some Heat

Says the WSJ http://blogs.wsj.com/law/2009/01/28/new-york-judge-puts-possible-bulls-eye-on-deloitte-touche/

Parmalat, an Italian dairy conglomerate, collapsed in 2003 following the discovery of a massive fraud in which the company allegedly overstated its assets by $16 billion.

At issue in yesterday’s ruling was whether Deloitte Touche Tohmatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm, Deloitte & Touche, S.p.a. Yes, Kaplan held, in denying a Deloitte Touche Tohmatsu’s motion for summary judgment.

“This is huge,” says Stuart Grant, plaintiffs’ counsel in the matter. Accounting firms, he says, often assert that their foreign affiliates are legally separate, thus limiting the asset pool available to investors who file suit. “They always argue that you can’t pursue the worldwide organization, sometimes successfully,” Grant says. “Judge Kaplan has finally made the law reflect reality. These accounting firms sell themselves as worldwide, seamless organizations. Now they are going to be held responsible in the same fashion.”

This is an interesting development, and it will be interesting to see what impact this has on the PWC-Satyam affair. I’ve always been curious about this type of firm (D&T, PWC, etc.), and a little perplexed as to why they remain so trusted despite some pretty huge and public mess ups on their part. Each of these firms (if you read the wiki page) has been engaged in a pretty huge scandal on at least one or two occasions, and seems to have emerged pretty unscathed. Obviously, Arthur Andersen collapsed with Enron, but that’s the only time I can remember one of these accounting firms going down because fraud happened on its watch. Isn’t their whole purpose to prevent fraud? Isn’t their existence part of the reason that we allow publicly traded companies to exist? They seem designed to fill an essential role, but I’m worried that a) They aren’t doing it well b) They don’t have incentives to do it well.