When announced in May 2012 that Rita Crundwell, long-serving controller for Dixon Illinois, had managed over twenty-two years to swipe $ 53 million of city funds from under the blind eyes of the town’s governing fathers, I wrote that “a nightmare of auditor litigation was inevitable…”
I also wrote -- riffing on Crundwell’s diversions that underwrote her luxurious, not to say, bizarrely ostentatious, quarter-horse hobby – that “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.”
Now, under a $ 40 million package of settlements reported last week, the City is to receive $ 1 million from the sole practitioner signing its audit reports since 2006 – a nice round number suggesting immediate capitulation by his malpractice insurer – and an all-in $ 35.15 million from the Midwestern firm CliftonLarsonAllen, providers of services that were – perhaps to its hindsight remorse – supposedly limited to theoretically low-risk compilation work.
The outward vision of piety expressed by Clifton’s chief executive, Gordon Viere -- “The right thing to do is reduce the harm experienced by the taxpayers of Dixon and put this matter behind us” – may to some degree soothe the pain this amercement will inflict on his partners.
Pragmatism figured large, however.
As I had calculated, using the consultants’ model I have applied for years to estimate the litigation impact that would disintegrate a large accounting network, a "worst case" result on a $ 53 million claim would have threatened the Clifton firm’s very survival – a collapse not unlike the litigation-driven bankruptcy of the mid-sized Laventhol & Horwath in 1990.
So, as I put it in anticipation of Viere’s predictable surrender:
“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.”
There are two larger lessons in these sums, for those concerned about the viability of the private accounting partnerships’ franchise to provide financial information assurance.
First, as I wrote when the Dixon fraud first broke, compilation services are a miserable bargain:
“The accounting profession, mistakenly relying on disclosure of the limits on what a compilation report does or does not say, has traditionally looked on that 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?”
Second, there’s an even bigger lesson at the global scale of the Big Four. Which is that, unhappy as its break-up would be for the Clifton firm’s partners, personnel and clients, sentimentality must yield to reality: its loss would have no broader impact on the audit services market.
But a similar fate for one of the Big Four would be fatal to the entire model – a Big Three system being unarguably unsustainable.
I have in the works, and will shortly offer here, an update to my November 2011 calculation of the Big Four firms’ shockingly small break-up thresholds.
Until that is ready, it suffices to note that Deloitte’s US firm faces an ostensibly “hard” trial date next month on claims by the bankruptcy trustee of fraudulent mortgage lender Taylor Bean & Whitaker, where there is more than $ 7 billion at stake – a nightmare number large enough by several multiples to reduce that firm to rubble.
For failure to lock the barn, in other words, the wild horses loosed by Rita Crundwell’s unbridled rapacity are still on the roam.
Thanks for joining this dialog. Please share with friends and colleagues. Comments are welcome, and subscription is easy and free, both at the Main page.
Comments