Web site prescribes remedy for accounting maladies

Deepa Babington

NEW YORK: After MicroStrategy Inc. said it would restate earnings last year,

investors sued not only the software firm but also outside accountant

PricewaterhouseCoopers, which agreed to shell out $51 million even while denying

any wrongdoing. As angry shareholders are more and more prone to sue accounting

firms, a new web site -www.accountingmalpractice.com

- is offering these firms information on how to protect themselves.

"A malpractice claim against an auditor can ruin his life, and they are

now becoming routine," said Mark Cheffers, founder of the three-month-old

web site and a certified public accountant himself. "People go after

accountants because they are perceived as having deep pockets."

The web site is a sign of the changing times, as claims against accountants

become commonplace. The reasons: Juries are starting to hold accountants to

higher standards, investors are looking for ways to recoup the investments in

bankrupt companies, and companies face more pressure to cook the books to meet

Wall Street's profit expectations.

It is difficult to determine whether the number of malpractice claims against

accountants has increased in recent times, but the dollar payouts on such claims

is rising, Cheffers said.

Between 3,000 and 4,000 claims are filed against CPAs each year, according to

accounting resource manual "Accountants' Legal Liability and Risk

Management." While claims against accountants were rare before the 1970s,

it said these days, one out of every 120 accountants is sued each year.

Widening expectation gap

In recent years, Cheffers said, juries are increasingly holding accountants

responsible for much more than accounting standards set by professional trade

organizations, expanding the net of legal liabilities for the accountant. For

example, the advent of the Internet has made it easier to find financial data

and do background searches on companies, but the accounting principles that

accountants live by don't require this.

‘The standards don't say anything in information," Cheffers said.

"But if you're on the (witness) stand and you're asked why you didn't find

this information with two clicks of the mouse, what're you going to say - 'My

accounting standards didn't say this?' Sorry, wrong answer."

The Securities and Exchange Commission is also playing a greater role in

regulating the accounting industry and is issuing its own guidelines for

accountants. That means the industry has to deal with multiple standard-setters,

Cheffers said. A slowing economy that has left American corporate icons bankrupt

- and therefore shielded from paying out against lawsuits - could also leave

accountants exposed to litigation as investors hope to recover losses, he said.

For example, home appliance maker Sunbeam Corp., beset by a heavy debt load

and a probe into its accounting practices, filed for bankruptcy protection in

February as a weakening US economy sapped sales. In April, the company's

auditing firm, Arthur Andersen LLP, agreed to pay $110 million to settle claims

of fraudulent accounting against it, but did not admit any fault.

"I think most accountants have (the thought of a lawsuit) in the back of

their minds," said Anthony Aceti, a CPA with Rothstein, Kass & Co.,

P.C., who welcomes the idea of the site. "It's litigious society."

Resources to educate offered



Among other things, Accountingmalpractice.com contains a database of about
250 malpractice cases filed against accountants, with court documents pertaining

to the cases meticulously scanned, stripped of the defendants' names to protect

their privacy, and summarized by Cheffers and his staff.

It also provides users with reports on liability risks, issues and trends

involved in accounting for specific industries, a section that in the future

Cheffers hopes will account for revenues that will make the site economically

viable. So far, however, the Web site, being relatively new, has a small

subscriber base of a little more than 100 people, Cheffers said, with weekly

traffic ranging from between 1,000 to 1,600 unique visitors.

He and his staff, who are based out of an office in a Manchaug, Massachusetts

building that more than a century ago served as headquarters for apparel and

underwear maker Fruit of the Loom, are looking for a partner to help market and

generate revenues from the site.

A former PricewaterhouseCoopers accountant, Cheffers worked for a lawyer

before starting the site. Ironically, he put together cases against accountants,

many of which could have been easily avoided if they had the necessary resources

or taken added care, he said. "We're kind of nerdy specialists,"

Cheffers said. "And we're saying to the accounting community - you need to

pay attention to this."

(C) Reuters Limited 2001.