Litigation risk broadly considered;

              Litigation Risk Broadly Considered Jerry D. Sullivan Public Oversight Board There is little doubt that litigation risk associated with the audit of financial statements, as well as other attestation assurances, is presently at a level that threatens the viability of the public accounting profession and is contrary to the public interest. A decade ago, it was infrequent to encounter a report of auditor litigation in the financial press. Today, it is virtually a daily occurrence. A decade ago, when the Auditing Standards Board was debating and finaliz-ing Statement on Auditing Standards No. 47, Audit Risk and Materiality in Conducting an Audit, an appropriate distinction was made between audit risk and audit exposure which is essentially litigation risk. The auditor was cau-tioned that when litigation risk was assessed as low, less extensive procedures should not be performed than would be otherwise required under generally accepted auditing standards (GAAS). Today, litigation risk is never assessed as low and the aforementioned cautionary note might be better restated to suggest that the auditor would be well advised to consider performing more extensive procedures than might otherwise be required by GAAS when auditing public companies. The Current Environment Small firms are divesting themselves of attest engagements, large firms are performing risk assessments of their clientele and resigning from "risk engage-ments" and curtailing many attest services, such as assurances on prospective financial information. Senior executives of the Big Six firms lament the fact that divesting themselves of smaller, lesser developed and more risky small public companies is contrary to the public interest as these entities are often in need of the most sophisticated assistance in producing reliable financial information. The actual cost of litigation involving the accounting profession has not been calculated, but it has reached proportions that threaten the solvency of even the largest firms. Spokesmen for the Big Six firms (those firms are involved in most of the litigation involving public companies) claim its aggregate cost is second only to human resources. Costs of defense on some cases have exceeded $15,000,000. Document reproduction alone is often in excess of $2,000,000 a case. The projected costs of defense for many cases have reached a level that indicate settlement is economically prudent even when the firm believes it has adequate defenses. Two recent highly publicized cases, the MiniScribe Corp. litigation involv-ing Coopers & Lybrand and the Lincoln Savings and Loan Association litiga-tion involving Ernst & Young, illustrate the level of stakes involved and the incentive for firms to settle.
49