Accountants' Liability Litigation

Chadbourne has an active practice in the defense of claims brought against accountants and other professional service providers. We have a broad range and depth of experience in representing both major national accounting firms as well as smaller firms in significant litigation and litigation-related matters, including the defense of securities fraud cases, negligence and malpractice actions, and regulatory investigations conducted by the Securities and Exchange Commission, the New York State Attorney General’s Office and other regulatory agencies.

What Distinguishes Our Practice

We have a consistent record of success because we are able to combine a wealth of practical experience at every phase of the litigation process—from motion practice, through discovery, and trial—with an in-depth understanding of accounting, auditing and tax issues, and of industry practices and the audit process. This in turn enables us to identify early on the strengths and weaknesses in cases and then develop and carry through sound and effective litigation strategies that produce results.

Our Attorneys

Our attorneys have extensive experience defending accounting firms and managing the substantive legal and accounting and auditing issues that arise in accountants’ liability actions. We have also worked closely and effectively with outside experts and audit partners in investigating and defending claims. We have handled accountants’ liability matters in various jurisdictions throughout the United States, as well as in foreign jurisdictions such as Russia and Kazakhstan.

The attorneys in this practice group have many years of experience in accountants’ liability matters, as well as in complex securities litigation matters that often implicate accountants. Members of the group have written and lectured extensively on accountants’ liability and related securities litigation issues. The group also draws upon the experience and skills of lawyers who are members of related and complementary practice groups, such as our bankruptcy, corporate and tax practices. In our representation of accounting and other professional service firms, we are therefore able to provide the full range of interdisciplinary skills that are required, including with respect to securities and securities regulatory enforcement expertise, internal investigations, white collar criminal defense and advice on specialized tax issues.

Our Experience and Results

Our practice group has a wide range of experience representing accounting and other professional service firms in matters of all kinds, including class action securities fraud claims, other types of fraud claims, claims of professional malpractice, and claims relating to improper tax advice. Our lawyers have represented Arthur Andersen LLP and other accounting firms in a wide variety of matters, including a number of reported cases such as Silverman v. KPMG, LLP (In re Allou Distributors, Inc.), 395 B.R. 246 (Bankr. E.D.N.Y. 2008); O’Connell v. Arthur Andersen LLP (In re AlphaStar Insurance Group Ltd.), 383 B.R. 231 (Bankr. S.D.N.Y. 2008);Giant Group, Ltd. v. Arthur Andersen LLP, 2 A.D.3d 189, 770 N.Y.S.2d 291 (1st Dep’t 2003), Giant Group, Ltd. v. Sands, 142 F. Supp. 2d 503 (S.D.N.Y. 2001), Hennessy v. Peoples, 282 A.D.2d 994, 728 N.Y.S.2d 729 (1st Dep’t 2001), Ciullo v. Orange and Rockland Utilities, Inc., 271 A.D.2d 369, 706 N.Y.S.2d 428 (1st Dep’t 2000), In re Computron Software, Inc. Securities Litigation, 6 F. Supp. 2d 313 (D.N.J. 1998), and Wiener v. Lazard Freres & Co., 241 A.D.2d 114, 672 N.Y.S.2d 8 (1st Dep’t 1998).

Recent representative matters include:

  • defense of an action in the United States Bankruptcy Court for the Eastern District of New York containing claims brought by a bankruptcy trustee and bank lenders seeking hundreds of millions of dollars of damages based on alleged fraud and accounting malpractice
  • defense against claims for fraud, aiding and abetting breaches of fiduciary duty and accounting malpractice brought by bankruptcy trustee in the United States Bankruptcy Court for the Southern District of New York
  • defense of securities fraud class action alleging that audit client improperly recognized revenue and otherwise misstated its financials
  • defense of malpractice claims asserted against accounting firm in connection with investigation by the New York State Attorney General’s Office
  • representation of firm and members of audit engagement team in connection with a formal investigation conducted by the SEC concerning the restatement of an issuer’s financial statements

Our attorneys are familiar with and regularly litigate the particular legal issues that arise in accountants’ liability cases, including

  • liability under the Private Securities Litigation Reform Act
  • the application of the Wagoner rule and in pari delicto doctrine defenses in cases of corporate fraud
  • the scope of the accountant’s duty of due care under the various privity standards
  • the elements of breach of fiduciary duty and aiding and abetting breaches of fiduciary duty
  • statute of limitation issues including the continuous representation doctrine and the interplay between contract and negligence limitations periods
  • damage issues, including business valuation issues, lost profits and the doctrine of deepening insolvency

In addition to our extensive experience with the range of substantive legal issues involved in accountants’ liability matters, Chadbourne’s attorneys understand and are well versed in accounting and auditing issues, including how audits are conducted and the application and interpretation of relevant professional standards. We understand the auditing process, including its objectives and limitations, and know what is entailed in performing an audit in accordance with Generally Accepted Auditing Standards (GAAS).

Chadbourne’s attorneys also are familiar with the types of accounting and auditing issues that arise in the context of particular industries and the particular auditing procedures designed to address particular risks associated with that industry. Industry sectors in which our attorneys have experience representing accounting firms and litigating accounting issues include:

  • banking and commercial finance, including asset-based lending
  • construction and government contracting
  • consulting
  • consumer products
  • distribution
  • insurance
  • not-for-profits
  • retail
  • securities
  • software
  • technology and telecommunications

In our practice, we have also dealt with a wide range of issues relating to Generally Accepted Accounting Principles (GAAP) that give rise to litigation. These issues have included:

  • accrual of loss contingencies under FAS No. 5
  • consolidation versus use of the equity method of accounting under APB 18 and off balance sheet transactions
  • special-purpose entities (SPEs)
  • substance over form accounting issues
  • valuation date issues with respect to issuance of securities
  • recognition of revenue from sales of software
  • use of the percentage of completion accounting method
  • valuation and amortization of intangible assets
  • valuation of residual interests in securitized loan portfolios
  • impairment of assets and write down of goodwill
  • misallocation of revenues

We recognize the challenges that accounting and other professional services firms face in the world of increased regulatory scrutiny and heightened public awareness of fraudulent financial reporting. Those challenges make it all the more important to have litigation counsel with the depth of experience, substantive knowledge and grasp of accounting and auditing issues that Chadbourne offers to its clients.

Representative Experience

Defense of Accounting Malpractice Action
Arthur Andersen LLP
Defense of actions brought against client by the Chapter 7 trustee and bank lenders in actions for accounting malpractice and fraud.
Defense of Accounting Malpractice Action
Arthur Andersen LLP
Defense of action brought by trustee in action for accounting malpractice and fraud.
SEC Investigation
Accounting Services Firm
Advice to accounting firm and individuals in SEC enforcement proceedings.
Defense of Accounting Malpractice Action
Arthur Andersen LLP
Defense of fraud and accounting malpractice claims brought in both state and federal court.
Accounting Malpractice Action
Auditing and Consulting Firm
Advice in connection with a malpractice action relating to the audit of a health care facility.


Related Practice Areas

Securities Litigation and Regulatory Enforcement
White Collar Defense, Regulatory Investigations and Litigation

Related Regions

North America
United States
 

Worldwide Contact

Alan I. Raylesberg
New York
+1 (212) 408-5198

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