[Congressional Record Volume 140, Number 95 (Wednesday, July 20, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 20, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
            LITIGATION CRISIS IMPERILS ACCOUNTING PROFESSION

                                 ______


                         HON. MICHAEL G. OXLEY

                                of ohio

                    in the house of representatives

                        Wednesday, July 20, 1994

  Mr. OXLEY. Mr. Speaker, I am concerned about the fact that the 
accounting profession is suffering under rapidly escalating litigation 
costs that are driving it away from auditing the small high-technology 
and high-growth companies that are often the target of meritless 
securities litigation.
  Between 1990 and 1993, the litigation costs of the six largest 
accounting firms, excluding insurance have nearly trebled, from 7 to 
19.4 percent of accounting and auditing revenues. Accounting firms are 
responding to these skyrocketing costs by aggressively winnowing out 
clients. For many years, the six largest accounting firms consistently 
gained SEC audit clients at the expense of smaller firms. That trend 
has reversed. In 1993, five of the large firms showed a net decrease in 
such clients--in 1991, by comparison, only two firms showed a reduction 
in SEC clients. For 1993, the six firms experienced a net loss in SEC 
audit clients--losses exceeded gains by 20 percent. The trend has 
continued in 1994. For the first quarter of the year, losses by the six 
firms exceeded gains by 10 percent.
  I am submitting for the Record an Accounting Today article that 
documents the impact of the securities litigation crisis on the 
accounting profession and the American economy. Notably, the author 
concludes that the accounting professions' difficulties are due in 
large part to its status as a ``deep pocket'' which, under joint and 
several liability, must pay 100 percent of the plaintiffs' damages, 
even if found only 1 percent at fault. Such a threat of massive 
liability can force a large settlement, regardless of the merits of the 
case. I am confident that my colleagues will see from this article how 
harmful the market incentives of the current securities litigation 
system are to the accounting profession and the economy in general.
  Finally, I would like to note that there is pending legislation in 
both Houses of Congress (H.R. 417 and S. 1976) that corrects the flaws 
of the securities litigation system. I urge my colleagues to support 
this legislation, and help change the dynamics of the securities 
litigation system by reforming joint and several liability.

               [From the Accounting Today, Mar. 14, 1994]

            Litigation Crisis Imperils Accounting Profession

                         (By Richard I. Miller)

       Accounting Today has given considerable space over the last 
     couple of months to a multi-part series featuring the 
     philosophies of Melvyn I. Weiss.
       Weiss has established himself as perhaps the nation's 
     premier accountants' liability class action plaintiff's 
     lawyer. From what I have seen, he has earned that 
     distinction.
       He makes his living suing accountants, and his articles 
     attacking the accounting profession read like many of his 
     briefs.
       Most disturbing is his technique for stereotyping an entire 
     profession because of a few highly publicized business 
     failures that Weiss, and his colleagues in the plaintiff's 
     bar, attempt to equate with audit failures.
       It is more than coincidental that many of the positions he 
     espouses for ``the public good'' do much to improve his 
     entrepreneurial interests.
       Weiss disputes the very existence of a litigation crisis.
       He insists that a few extreme and isolated ``horror 
     stories'' are representative of the vast amount of high 
     quality work the accounting profession performs year in and 
     year out.
       He believes the accounting profession was wrong in seeking 
     the role of auditors of publicly traded companies' financial 
     statements, instead of leaving the job to the government.
       He thinks it is an abuse of the litigation system for 
     accounting firms to defend themselves against his law firm--
     and others like it--with the legal procedures available under 
     the law.
       He thinks tort reform is an effort to limit a plaintiff's 
     access to the courts.
       This is all, quite literally, incredible, It's time to set 
     the record straight.
       There is a litigation crisis, and its getting worse.
       There is no question that auditors' exposure to liability 
     has generated increasing concern throughout the accounting 
     profession. That concern is more than justified by the facts.
       For example:
       Sen. Christopher Dodd, D-Conn., chairman of the Securities 
     Subcommittee Senate Banking Committee, recently announced his 
     findings that ``the securities litigation system is not 
     working as it should and needs improvement.''
       The Public Oversight Board concluded in March 1992 that 
     ``the litigation risks confronting the profession pose 
     serious dangers to the ability to perform its assigned role 
     in society.''
       According to a recent survey of American Institute of CPA 
     members, more than one in 10 firms intend to ``discontinue 
     doing business in certain industries or with certain 
     organizations'' because of litigation risks.
       One-fifth of the firms indicated that they would 
     ``discontinue providing or performing certain types of 
     services,'' also because of liability concerns.
       One aspect of the profession's liability burden that has 
     been the focus of recent public debate involves securities 
     fraud class action lawsuits.
       Virtually everyone who is familiar with the securities 
     litigation system--with the notable exception of class action 
     plaintiffs' lawyers--agrees that the system is not working as 
     it should.
       Congress is currently considering changes to that system.
       Whether or not you call it an ``explosion,'' both the 
     number of securities class actions and the economic stakes 
     involved in this litigation have climbed significantly in 
     recent years.
       The number of securities fraud class actions filed under 
     Securities and Exchange Commission Rule 10b-5 has tripled 
     since 1988, and a record 614 suits were filed in 1990 and 
     1991, more than in the five previous years combined.
       Weiss' law firm alone filed 229 securities fraud lawsuits 
     in the past three years. And, the average claim has soared to 
     $40 million, compared to just $1.2 million in other federal 
     actions.


                 who benefits from all this litigation?

       The statistics that show the expanding magnitude of the 
     litigation crisis do not, by themselves, make the case for 
     liability reform.
       If the litigation reflected an increase in wrongdoing, if 
     the suits had legal merit, and if legal action was providing 
     appropriate compensation to genuine victims of fraud, there 
     would be little justification for change in the liability 
     system.
       Under those circumstances, economic discomfort for 
     defendants could be viewed as the justifiable outcome of 
     public policies designed to protect investors.
       Unfortunately, this is not the case. The current system of 
     class action litigation--which fails to distinguish between 
     meritorious and baseline claims--is not serving the interests 
     of the investors it was designated to protect.
       By diverting corporate resources from productive activities 
     to legal costs, it diminishes the value of investors' 
     holdings.
       In addition, because it chills public disclosure of 
     corporate financial data needed by investors--the exact 
     opposite of what the securities laws were intended to--the 
     interest of investors in the free flow of information is not 
     served.
       What's more, a variety of independent studies show that 
     plaintiffs recover only pennies of every dollar in claimed 
     losses. Thus, the investors' interest in receiving recompense 
     for wrongs is not served.
       Other studies have shown that virtually all cases are 
     settled without any determination of guilt or innocence, 
     compared to a typical settlement rate of 60-70 percent in 
     other civil suits.
       And, a recent analysis by National Economic Research 
     Associates of White Plains, N.Y., found that settlement 
     amounts do not reflect the merits of the case--they tend to 
     reflect the depth of the defendants' pockets.
       In fact, legal experts say the combination of high 
     settlement rates and low recovery is strong evidence that the 
     plaintiffs' cases are weak--otherwise they would insist on a 
     trial, or demand large settlements.
       This demonstrates that the interest of investors and the 
     public to ferret out the truly culpable parties is not being 
     served.
       The conclusion, therefore, is manifest. This is not a 
     system operating to the benefit of investors and creditors.
       The only beneficiaries of this system, and the only parties 
     whose interests are being served, are the plaintiff's 
     attorneys and law firms who claim approximately one-third of 
     every settlement they extract.
       Perhaps most indicative of the failures of the current 
     system is that shareholder and investor groups--often the 
     plaintiffs in these suits--have come out in support of 
     legislative reforms to the securities litigation system.


        why pursuing ``deep pockets'' is the strategy of choice

       The failings of the litigation system are traceable in 
     large part to the doctrine of joint and several liability, 
     under which a single defendant in a lawsuit can be held 
     liable for the collective damages caused by all defendants.
       This rule creates an almost irresistible incentive for 
     plaintiff's attorneys to seek ``deep pocket'' defendants such 
     as accountants, underwriters and outside directors, no matter 
     how peripheral their involvement in the alleged misconduct.
       A recent study shows that accountants as a class are the 
     most frequent targets of weak securities claims.
       Because the potential liability is so great and the legal 
     costs of defending a suit so high, most defendants regard 
     settlement before trial as the best business decision--even 
     if they are innocent.
       Given the near certainty of settlement, the system invites 
     plaintiffs' lawyers to maximize the volume of suits, 
     regardless of the underlying merits.

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