Having financed her luxury-level hobby horses on an apparently modest five-figure city salary, revealed as supplanted by twenty years of hand-over-fist embezzlement, Rita Crundwell now faces twenty years of federal prison time (here).
As of December, the town added Midwestern regional accounting firm CliftonLarsonAllen as a litigation target (here) – liability being asserted for its multiple roles including Crundwell’s own tax return preparer and keeper of the city ledger, as well as auditor of the town’s financial statements until 2006 when it dialed back to “compilation services.”
A full-out courtroom scuffle would be interesting. On the one hand, the accountability of Dixon’s own city fathers over the extended looting of an annual budget of only $ 8 to $ 9 million implicates their guardianship of the municipal barn door through which Crundwell cantered away with her bags of stolen loot.
But as I wrote at the time:
“The accounting profession, mistakenly relying on disclosure of the limits on what a compilation report does or does not say, has traditionally looked on (compilation) work as low risk – which it mostly is. But consider the environment, and the typical level and quality of competence, governance and integrity in municipal government. What level of confidence should with safety be routinely reposed in those entrusted with management of a small city’s financial resources?”
On the recent reporting, the Clifton firm’s reliance on the limited duties associated with a compilation is exposed to collateral arguments about its deeper involvement: emails continuing to refer to “audits,” alleged working-paper support to the local sole practitioner putting his name to the opinions, and maintenance of a steady-to-increasing stream of fees even with the reduction in its stated scope of responsibilities.Limited as compilation work requirements may be, they continue to require fulfillment of professional standards of quality control, ethical principles of integrity, objectivity competence and due care.
And by way of reinforcement, commentators and standard-setters continue to press the importance of skepticism in oversight (here and here) – difficult enough to achieve, and hostage to fortune whenever tested under the harsh glare of hindsight.
However -- those expecting a shoot-out at the Dixon corral should prepare for a damp squib instead -- mainly because the prospect of an actual trial rather than an out-of-court settlement is so slight.
That’s because the Clifton firm’s exposure is life-threatening, and so unlikely to be tested in a trial.
Which is despite the fact that Dixon’s outside lawyers hold themselves out as personal injury lawyers, who do not publicize accountancy litigation as a practice area. So they are unconstrained outsiders to the culture of the traditional accountancy plaintiffs’ bar, which has long calibrated its high-end demands so as to wring only enough from the flock of Big Firm geese to enrich themselves while sustaining the steady supply of golden eggs.
Instead, using the model on which I have previously explored the shockingly small size of a litigation threat that would disintegrate a global-scale accounting firm (here), the Clifton firm’s reported $ 570 million of annual revenue is a fragile base from which to defend against a worst-case impact on the order of $ 53 million. [1]
No management has the fortitude, much less the confidence – except under the most extreme duress -- willingly to submit the quality of its work to a civil jury for such a price.
Existential threats from litigation are an unconfronted daily reality for the Big Four firms (here). But no less for their smaller brethren, where the threat is on a “one-and-done” basis. BDO’s ability to withstand the adverse jury verdict in the Bankest case in Florida was a fortuitous combination of persistence, favorable court rulings and an eventual settlement – still not publicly disclosed (here and here). And the Baker Tilly firm’s $ 50 adverse verdict in Wisconsin in the Aqua Finance matter – unhappily including a coverage dispute with its insurance carrier (here) – surpasses its resources on a worst-case basis as well.
None of which bodes well for the strength, sustainability or long-term future of the assurance function – professed to be important to society’s ability to rely on audited financial statements.
Instead, the clock of doom ticks toward midnight.
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[1] Write me for the details if interested. My pencil pushing suggests a break point of around $ 50 million, but precision is impossible. Insurance coverage and deductibles have relevance, but only as a measure of the pain that might be inflicted on future generations of Clifton partners.
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