United States: MF Global-PwC Fight Could Set Troublesome Precedent

Last Updated: March 17 2017
Article by Jacob S. Frenkel

Sometimes, a case comes along appearing to be on the side of right and vindication although in reality, it is a wolf in sheep's clothing. In the corporate boardroom world, one of the most glaring examples was the U.S. Department of Justice's gross overreach to extend the concept of honest services fraud to corporate executives doing their jobs. The U.S. Supreme Court cut off prosecutors' hands with its stinging rejection of the hyperextended legal theory in the Jeffrey Skilling (Enron) and Conrad Black (Hollinger) cases. One such civil trial underway similarly has all the trappings of bad law, untenable precedent and disruption of professional standards. The auditors do their jobs correctly, get the audit right and still get sued. That case is MF Global's final flailing shot directed at its former audit firm, PricewaterhouseCoopers (PwC).

The glaring misperception created by the mere filing of the case is that PwC had or should have some responsibility for the collapse of MF Global. In this age of popularizing alternative facts and fake news, the plaintiff is attempting to rewrite the history of MF Global inconsistent with what actually happened. Bad business judgment, actually mistimed business judgment, not accounting, caused MF Global's demise. Nevertheless, lawyers for the vulture-fund plaintiff have concocted a contorted theory that the auditors should be liable for something that is unrelated to the audit. Auditors do not audit business judgment; they audit financial statements. And, here MF Global's accounting was correct, and PwC's audit was correct.

So, rather than focusing on the plaintiff's wish, which is undeserving of fulfillment, energy is better spent on the express standards of the Public Company Accounting Oversight Board that establishes clearly the roles of management as distinguished from the auditors. "The financial statements are management's responsibility." Management got that right — the accounting was correct. "The auditor's responsibility is to express an opinion on the financial statements." PwC did and did so correctly. "The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud." PwC was able to obtain such reasonable assurance because there were no material misstatements in the financial statements. That should mark the end of the analysis. Instead, easy access to America's courtrooms makes litigation possible even against "good Samaritan" doctors who come to the aid of someone in distress. So too here, this case never should have made its way into a courthouse.

As a lawyer whose practice has been in and around securities "enforcement" matters, accountant conduct and accounting issues now for almost 30 years, certain hallmarks of a framework for a potential claim against accounting firms are absent here. One is a restatement, meaning that previously issued financial statements requires a corrected filing. Even in a restatement, where frequently the accounting firm did not err, there likely still is regulatory scrutiny to figure out whether the accounting firm had any responsibility. Here, there was no restatement, and there was no need for one because of the widely acknowledged correct accounting.

The other is a direct claim, often an enforcement action, by salivating regulatory authorities, here the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. From the first day of concerns about custody of customer funds and the run to withdraw funds from accounts at MF Global, Congress, the SEC and the CFTC began their respective microscopic scrutiny to determine what went wrong at MF Global. Congress is not shy to issue stinging reports, and the SEC and CFTC never are reticent to hold accounting firms accountable in headline-attracting cases. None did so against PwC. There was but one enforcement action by the CFTC, and it was against Jon Corzine. There was no enforcement action by the SEC or the CFTC against PwC.

There is no altruism on the plaintiff's side. This case is not about victims. In fact, the plaintiff does not represent innocent shareholders or customers harmed by MF Global's collapse. All innocent customers of MF Global's actions already have been made whole. This lawsuit is funded by parties that bought MF Global debt after its bankruptcy. They are gamblers who lost, and now are trying to blame a nonresponsible party.

Normally, plaintiffs asserting financial loss enjoy a perception that they are vindicating a right. Not here, where the riders of the white horses are PwC's audit team. The true white knights are the audit firm's advocates and experts. Accounting firms certainly do make mistakes in audits and subject themselves to liability, despite their best efforts in most audits. We see countless examples of that in the SEC enforcement world in which I live. Here, PwC did not make any mistakes. The accounting was correct. The collapse of MF Global had nothing to do with the accounting or auditing.

Corporate business judgment errors are not and should not be the burden of the auditors. A finding otherwise will turn upside down auditing of public and regulated companies and create a troublesome and unwelcome precedent. Hopefully, the outcome will favor auditing, not just these auditors.

Originally published by Law360.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jacob S. Frenkel
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions