State Board Report

December 2009

“The law is catching up with what the public is saying with the use of firm names,” James J. Sabella, Esq., said during a fast‐paced panel session at the Baruch/CPT conference, moderated by Baruch Professor Douglas Carmichael. “If you are going to say to investors that you are one firm worldwide – it is hard to say when something goes wrong, ‘Only kidding!’ You have to actively exercise the control that you have, rather than let the local partners run amok,” Mr. Sabella stated. His firm, Grant & Eisenhofer, had represented plaintiffs in the Parmalat case against Deloitte that ended in a settlement.

Michael R. Young, Esq., of Wilkie Farr & Gallagher, said, “Historically, the courts have not allowed liability to spill over.” There has been recognition that the firms have operated as individual entities. However, he also observed, “Major firms are becoming more integrated – and it’s not just the Big Four. From a practice perspective there are advantages for integration, but the lesson from the law is the more you integrate, the more you risk taking on liability.”

A similarly bleak view was voiced by James R. Peterson, Esq., a former large accounting firm partner, who observed: “Increasing globalization draws on crosslisting on capital markets. Multi‐firm performance involves personnel in other countries. Foreign purchasers are listed on foreign exchanges and you have to resort to using the resources of others. “ He cited several recent international cases against large firms and concluded that the firms’ franchise is in “a fragile state at this point.” Key decisions in an audit are made by the audit partner, and Mr. Peterson said, “One decision could bring down 25 percent of the profession.”

The attorneys were critical of the Treasury Department’s Advisory Committee on the Auditing Profession’s failure to make any recommendations about the concentration of auditing of public companies within four firms worldwide. Mr. Peterson said, “The profession is down to critical mass. The destruction of one of those firms would take down the whole system.” He did not think the U.S. Congress would take on this problem at this time. “The business model of the firms does not work and no one is talking about alternatives,” he stated.

The NASBA/AICPA Uniform Accountancy Act Committee met on November 18, 2009 in Chicago to begin their discussion of firm names as mentioned in the UAA and the Model Rules. The white paper released by the AICPA/NASBA study group in August served as the starting point for the meeting’s agenda.

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