Audit Firms' Global Ambitions Come Home to Roost

(page 2 of 2)

In his ruling, Kaplan notes that "although disclaimers on DTT's website assert the legal separateness of DTT and its members, DTT's goal, as expressed by its chief executive officer, James Copeland, was for clients to 'get consistent seamless service across national boundaries.' Member firms therefore use the Deloitte name when serving international clients 'in order to project the image of a cohesive international organization.'"

Kaplan's decision isn't binding on other judges, but he is well-respected in legal circles and operates in the most closely watched district in the securities industry, Grant notes. How much sway his thinking will have and how it might affect the firms is now "the $64,000 question," says Steven Berger, a lawyer in the New York office of Vedder Price who's not involved in the case but is watching it closely.

"Going forward either [the firms] become one organization and assume the responsibility of all of the actions in every country, or they go to the other extreme, making them looser with less control," says Berger. "Then the question is whether that will result in a diminution of quality."

The India Tale

Heigthening interest in this decision is its coming just as another Big 4 firm, PricewaterhouseCoopers, has become the subject of a number of lawsuits over its Indian affiliates' audits of Indian outsourcer Satyam Computer Services. The full extent of the Satyam case is still unfolding, but in a letter to the company's board, CEO B. Ramalinga Raju said that for many years he inflated the company's results. Prosecutors later claimed that the company's employee rolls were inflated to benefit Raju, a charge his lawyers denied.

Two of Price Waterhouse India's partners, S. Gopalakrishnan and Srinivas Talluri, have been held in a Hyderabad jail since Saturday. They have been suspended from their duties by the firm in order to focus on the Satyam investigation. In a statement, their firm, which is one of the largest auditors in India, said it doesn't know the basis on which they were detained and that the firm has been been cooperating fully with authorities.

"We share the regulators' concern in understanding the full extent of the fraud and how it was accomplished. Like everyone else, we were shocked by the massive fraud at Satyam and by the steps undertaken to conceal it," the firm said.

But Mike Davies, the communications director at the international accounting firm PwC, who has been deployed to Mumbai to help the local firm through this crisis, sought to make clear the distinction between the global group and local affiliates.

Global? Moi?

"There isn't such a thing as a global firm," Davies says. "We are a membership organization." The individual country firms, he says, "are not collected legally in terms of ownership. Each firm is owned separately in their own country by their local partners." As to the shareholder suits filed in the U.S., including at least one naming the global firm, PwC "will be robustly defending them," says Davies.

Those and probably a few more. Shareholder lawsuits in general have been on the rise. In 2008 federal securities fraud class-action filings hit their highest level since 2004. Some 226 cases were filed on behalf of investors who have lost as much as $856 billion, according to the Stanford Law School Securities Class Action Clearinghouse. Most of the cases involved financial firms and were filed in the Southern District of New York.

Not surprisingly, lawyers expect to file more suits in 2009. And audit firms just became a much more attractive target.

An earlier version of this story incorrectly stated that Deloitte Italy is no longer an ongoing concern. It is. Grant Thornton's Italian firm was closed after the Parmalat issues came to light.

Byrnes is a senior writer for BusinessWeek in New York.