Discussant's response to "Litigation risk broadly considered";

              Discussant's Response to "Litigation Risk Broadly Considered" Lawrence A. Ponemon* State University of New York at Binghamton The paper presented by Jerry Sullivan [1992] provides a thought-provoking essay dealing with the ever-increasing occurrence of litigation risk in the audit-ing profession in the United States. The author provides some preliminary evi-dence on the nature and extent of alleged audit failures gathered from peer reviews of SEC Practice Section (SECPS) member firms over a three year pe-riod and 90 QCIC cases reviewed by the Public Oversight Board (POB). His findings imply that the recent wave of alleged audit malpractice, especially law-suits against Big Six firms, may not be caused by substandard audit work. Rather, Sullivan intimates that much of the present-day litigation alleging audit failure may be baseless and without merit. Despite judicial reality, innocent firms may choose to make out-of-court settlements to avoid the high cost of a proper litigation defense and the peril of punitive damages as, for example, experienced by Coopers and Lybrand in the MiniScribe case [see The Wall Street Journal, February 18, 1992, p. C-11]. As posited by the author, a direct consequence of increasing litigation cost is a commensurate reduction in the profession's reputation and ability to provide quality independent audits of client companies. Given recent negative economic events in the United States caused, in part, by recessions in global financial markets and the crisis in the national Savings and Loan industry, the public's positive perception of the independent auditing profession may be dwindling. This, in turn, could lead to clients and financial statement users alike placing less faith in audit opinions and placing greater reliance on legal or contractual arrangements. As the demand for public accounting services declines, govern-ment authorities may become more actively involved in the regulation of the profession. Loss of the public trust and resulting governmental interventions can cause the demise of the public accounting profession. Admittedly, it is difficult to engage in an intellectual debate when you agree with the fundamental arguments raised by your opponent. My discussion, how-ever, will attempt to provide a critical analysis of Sullivan's contentions as well as a reinterpretation of his results. The remainder of my paper is organized into two parts. First I will comment on what I believe are the most salient aspects of the several excellent points raised by the author. In particular, I will touch upon * At Babson College at the time of this presentation. The author acknowledges the many helpful comments provided by Abraham Akresh, Richard Mandel and Zoe-Vonna Palmrose, and appreci-ates the editorial assistance provided by Joan Grossman.
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