In an opinion today, Judge Forrest granted summary judgment to two affiliated accounting firms in a securities fraud suit arising from what Judge Forrest described as an accounting firm’s “worst nightmare”:
An accounting firm’s worst nightmare might be to wake up one morning and discover that the company that one of its teams had audited for the past several years had in fact disappeared, and that what the team had been auditing had been merely a mirage. A twist that could serve only to heighten this distress might be the discovery that the company had been stolen a few years prior — its operations and related revenues transferred away — but that the engagement team had not discovered this fact. The team had issued a “clean opinion.” The accounting error in such a case would be fundamental: all aspects of the financial position of the company would have been entirely misstated, because the operations on which it was based were long gone. This scenario is not the storyline for an auditor’s version of a horror film; it is what happened here.
Notwithstanding the nightmare scenario, Judge Forrest granted the auditors summary judgment because there was no evidence that they departed from the governing Public Company Accounting Oversight Board ( “PCAOB”) standards:
Plaintiffs have put forth no admissible evidence as to what PCAOB standards the Auditors failed to comply with; nor have they offered any admissible evidence that their conduct not only failed but egregiously failed to meet those standards. Indeed, to raise a triable issue as to recklessness, plaintiffs must put forth facts that could lead to an inference that, under the applicable PCAOB standards, the Auditors’ practices constituted “shoddy accounting practices” that fell so egregiously short of the applicable professional standards of care as to amount to “a pretended audit” or no audit at all. Plaintiffs have not made any showing in this regard at all. Instead, for tactical reasons best known to themselves, plaintiffs withdrew the only accounting expert they had on PCAOB standards . . . .
The plaintiffs argued that the failure to unearth documents about the missing subsidiary was reckless, but Judge Forrest disagreed:
The Court has considered these arguments carefully. Again and again, however, the Court returns to the question of whether a reasonable auditor would have taken such steps under the circumstances, not whether a reasonable auditor could have. Again and again, the Court is left with the conviction that proof is necessary of what auditors conducting audit procedures under PCAOB standards would do; how many steps and which steps would be enough; and where to draw lines between what is a belt alone and when the belt is combined with suspenders. Could more have been done? Clearly yes. Did more need to be done, and would auditors conducting a PCAOB-compliant audit have done more? Neither the Court nor any reasonable juror at a trial has any way to answer this question. In contrast, the Auditors have proffered admissible testimony from [their experts] that they conducted audits . . . according to PCAOB standards. This testimony stands unrebutted.