The Liability Crisis in the United States: Impact on the Accounting Profession

Abstract

In recognition of the growing litigation crisis in the United States, the six largest accounting firms recently issued a historic joint statement of position titled The Liability Crisis in the United States: Impact on the Accounting Profession. Below is a resolution by the board of directors of the American Institute of CPAs urging tort reform, commending the work being done at the state level to reduce the threat posed by unwarranted liability and endorsing the joint statement. The statement itself begins on the facing page. AICPA BOARD RESOLUTION ON LEGAL LIABILITY WHEREAS: The AICPA, on behalf of the entire accounting profession, has been seeking judicial and legislative reforms responsive to the liability crisis affecting the United States; and WHEREAS: Unwarranted litigation affects new business ventures in their efforts to raise capital and also impacts local, national and global businesses; and WHEREAS: The cost of litigation ultimately is passed on to the general public; and WHEREAS: The accounting profession as a whole faces thousands of lawsuits claiming many billions of dollars in damages, far exceeding its proportionate share of responsibility; and WHEREAS: In 1991, the six largest firms spent $477 million on legal matters--9% of their domestic auditing and accounting revenues and an 18% increase over 1990 litigation costs; and WHEREAS: Litigation claims against other firms rose by two-thirds between 1987 and 1991 and 40% are going bare in light of the cost of liability insurance; and WHEREAS: A growing number of firms are avoiding high-risk audit clients and even whole industries and some small firms are dropping public clients or abandoning their auditing practices altogether; therefore BE IT RESOLVED: That the board of directors of the American Institute of CPAs endorses the position paper issued by the six largest accounting firms, The Liability Crisis in the United States: Impact on the Accounting Profession. The board believes the paper fairly reflects the nature of the litigation crisis in this country and appropriately emphasizes that in seeking litigation reform the profession is not attempting to avoid responsibility where accountants have breached their duty; and BE IT FURTHER RESOLVED: That the AICPA believes reform of the federal securities laws is essential to curb unwarranted litigation and would be an important first step toward instituting broader liability reforms; and BE IT FURTHER RESOLVED: That the AICPA also commends the work being done at the state level to reform state liability laws through legislative and judicial initiatives and to remove harmful regulatory and professional restrictions. The profession's ability to meet public expectations would be greatly enhanced by exploring all possible alternatives for reducing the threat unwarranted liability poses to the entire profession. THE LIABILITY CRISIS IN THE UNITED STATES: IMPACT ON THE ACCOUNTING PROFESSION The following statement was signed by J. Michael Cook, chairman and chief executive officer, Deloitte & Touche; Eugene M. Freedman, chairman, Coopers & Lybrand; Ray J. Groves, chairman, Ernst & Young; Jon C. Madonna, chairman and chief executive, KPMG Peat Marwick; Shaun F. O'Malley, chairman and senior partner, Price Waterhouse; and Lawrence A. Weinbach, managing partner and chief executive, Arthur Andersen & Co. The tort liability system in the United States is out of control. It is no longer a balanced system that provides reasonable compensation to victims by the responsible parties. Instead, it functions primarily as a risk transfer scheme in which marginally culpable or even innocent defendants too often must agree to coerced settlements in order to avoid the threat of even higher liability, pay judgments totally out of proportion to their degree of fault and incur substantial legal expenses to defend against unwarranted lawsuits. …

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