25 Jan

Audit Malpractice Defense: Four Key Issues

When a major fraud is discovered in a company, one of the key targets of litigation is usually the independent auditors. Two well-publicized cases in which management or shareholders suing the auditors after fraud was uncovered involve Koss Corp. (auditors Grant Thornton) and Navistar International Corp. (Deloitte & Touche).

Plaintiffs look to the auditors for potential recovery since the auditors typically have deep pockets and large insurance policies. Auditors (and their attorneys) need to know how to defend themselves in these suits.  Naturally, the auditors recognize that audits are supposed to provide reasonable assurance that the financial statements are fairly stated. Read More

17 Jan

Auditor Malpractice: How to Sue an Audit Firm and Win

Last week, Reuters printed an interesting and enlightening interview with Steven Thomas, the managing partner of Thomas, Alexander & Forrester … an attorney known for suing large auditing firms for malpractice… and winning!

Recent big wins include $520 million and $130 million judgments against BDP Seidman, on behalf of Espirito Santo and Batchelor Foundation, respectively. Auditors Ernst & Young (E&Y) and KPMG have been on the losing sides of large cases, and Deloitte, E&Y, KPMG, and McGladrey & Pullen are all current defendants.

So how does Thomas (or any plaintiff’s attorney) win a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case)? Read More

17 Jan

Koss Corp. Fraud: Defending Grant Thornton? No.

fraudI have been criticized for “defending” Grant Thornton, the auditors of Koss Corp, which has suffered a fraud loss of at least $31 million at the hands of the company’s Vice President of Finance, Sue Sachdeva. In fact, my comments relating to this case are not a defense of Grant Thornton, in the least. They are meant to point the finger squarely at Koss management, which is wholly responsible for this fraud.

I’m not saying that Grant Thornton did a bang-up job when it comes to Koss. I couldn’t possibly know that without knowing exactly how the fraud was carried out (Koss still hasn’t said) and without seeing GT’s workpapers and taking a good look at what they actually did. What I am saying is that audits have so little usefulness and are so awful at detecting fraud, that it’s a given that a woman like Sue Sachdeva would easily be able to get away with a massive theft. Read More

06 Jan

Koss Fraud: Losses Higher, Grant Thornton Fired, Baker Tilly Virchow Krause Hired

kossI’ve had plenty to say about the massive fraud Koss Corp has suffered at the hands of their Vice President of Finance, Sue Sachdeva.

In this news story from Milwaukee’s ABC affiliate, WISN 12, I talk about how a company with annual revenue in the $40 million range can fall victim to a fraud loss of $31 million (current estimate, up from original estimate of $4.5 million and first revision of $20 million): Read More

30 Oct

Auditor Liability in Market Meltdown?

It should come as no shock to anyone that lots of fingers are being pointed related to Wall Street’s meltdown, and specifically related to the banking industry. And auditors are likely to find themselves the targets of lawsuits. Auditor malpractice is often hard to prove, but in this case, I think there will be several victories against the auditors. Read More

13 Sep

SEC brings charges against auditors

69 auditors have been charged by the Securities and Exchange Commission with issuing audit reports on the financial statements of public companies without first registering with the Public Company Accounting Oversight Board.

The SEC has named 37 unregistered audit firms and 32 audit partners in this violation of the Sarbanes-Oxley Act of 2002. According to the SEC: Read More