Faculty Scholarship 1994 - Present

Ham v. Deloitte: Self-Regulation in the Accounting Industry is called into Question

In recent years, major public accounting firms have experienced a significant increase of malpractice claims, as disappointed investors seek deeper pockets from which they hope to gain compensation for investment losses. While such litigation is not cause for surprise, the manner in which the major accounting firms pooled their malpractice insurance coverage certainly was. Equally surprising was the disclosure that executive officers from the largest public accounting firms routinely consulted on, and routinely refrained from becoming expert witnesses in, malpractice cases pending against them. The disclosure of this conduct, which raises several significant issues related to the legal, professional and ethical responsibilities of public accounting firms, surfaced during the litigation of an intentional interference with contractual relations claim brought by a former partner in one "Big Five" public accounting firm against another "Big Five" public accounting firm and its general counsel. The issues that emerged during the litigation and are explored in this article are: (1) the professional and ethical responsibilities of the "big-five" public accounting firms in rendering auditing and consulting services to clients and the success of the accounting profession to regulate itself, (2) the implications of cooperative, information-sharing contacts among executive officers of the large public accounting firms undertaken to minimize liability for, and malpractice insurance fees covering, negligently rendered accounting services, (3) the legal obligations imposed on professionals employed by accounting firms and the elements that must be proved to establish a claim for negligently rendered accounting services, and (4) the overlapping web of professional responsibilities as public accounting firms employ staff from more than one professional field. In order to make the information most useful to business faculty, the faculty scenario that emerged during the litigation, gleaned from the numerous depositions and discovery documents submitted to the court, is provided initially. Thereafter, specific questions addressing the above noted issues are posed and answered by the authors of this article.