Bankruptcy

Accounting Firm Not Held Liable

By J. Michael McBride

The 7th Circuit Court of Appeals recently rendered a decision which held that an accounting firm would not be held liable for giving an auditing opinion involving a purchaser company shortly before it acquired a dot.com-based business.

Before reviewing the decision itself it is quite interesting to read what the 7th Circuit stated about Trustee suits in general. First, the Court notes that unlike an ongoing business, a Trustee does not have to concern himself about “future relations with suppliers, customers, creditors, and other persons with whom the firm deals ... and by the cost of litigation. [W]hile the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims.” The Court of Appeals goes on to conclude that Bankruptcy Courts must be diligent to assure that Trustees do not bring frivolous claims and then reminds the Court of their power to sanction Plaintiff Trustees who bring frivolous suits!

The Court also noted that the damages claimed by the Trustee in his suit was greatly in excess of the amount owed the debtor’s creditors. Thus, the result of a successful suit would be to enrich the debtor’s stockholders. “US web cannot be at once the cause of the bankrutpcy and its principal beneficiary.”

As to the decision to find KPMG not liable for its auditing on the eve of the dot.com stock market debacle, the Court held that the cause of the decline in the value of stock (which was the basis for the damage claim) was market wide and had nothing to do with the audit. The Court also noted that it was not the duty of the auditor to advise on whether the company’s corporate acquisition was a good or bad risk (it turned out badly because of the stock market decline in 2000).

Here is a link to the case:
http://www.ca7.uscourts.gov/tmp/D40ND5S1.pdf

Michael

Full post as published by Texas Lawyer Blog on May 08, 2008 (boomark / email).