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Jumping Ship : Several recent firings of O.C. companies by their outside auditors reflects national trend

October 22, 1995|JAMES S. GRANELLI | TIMES STAFF WRITER

The dire news for some companies seemed to roll in all summer.

Comprehensive Care Corp. in Newport Beach was suddenly dumped by its auditor, the Big 6 accounting firm of Arthur Andersen & Co. for what appeared to be no good reason.

Wiz Technology Inc. in San Juan Capistrano got into a nasty argument with its outside auditor, Corbin & Wertz in Irvine, over how to account for certain expenses. The auditor resigned.

HTP International Inc. in Anaheim was rocked by the resignation of its auditor, Jaak (Jack) Olesk of Beverly Hills, who alleged that the company had booked $9.3 million in nonexistent sales. Olesk called the overstatement a fraud.

In the number-crunching world of accountants, resignations are serious matters, with far-reaching consequences for investors, lenders and other creditors, as well as for the employees and the companies.

But the plight of the three Orange County companies is hardly unusual. Nationwide, accounting firms have been ditching corporate clients more and more in the past year. What was once a rare event has become more common.

Pressured by punishing verdicts and a continuing plethora of lawsuits, accounting firms are devising their own ways to limit the risk of getting sued by dumping their riskier clients.

Bloodied badly by the savings and loan debacle and Wall Street finagling of the 1980s and blistered by lawsuits that have since cost them hundreds of millions of dollars, gun-shy accountants now are quick to pull up stakes with the slightest hint that something is amiss.

Big 6 accounting firms, in particular, have been dropping more clients than they have been taking on as part of their intensified effort at risk management. They account for the auditing of more than 90% of the nation's public companies.

When auditors notify the Securities and Exchange Commission about their resignations, the language is usually vague. A company may no longer fit an accounting firm's "client profile" or has problems with "internal controls." An auditor even may have concerns about "management integrity."

But it all boils down to one thing: Accountants don't want to go down with a failing client.

Big 6 firms said they paid a total of nearly $1.1 billion in judgments, settlements and legal defense costs in 1993, the latest year for which complete statistics are available. Settlements alone last year cost them $620 million.

Participants in Orange County's investment pool--which lost $1.7 billion, leading to the county's bankruptcy last December--hope to pick up a chunk of their loss from KPMG Peat Marwick, the Big 6 accounting firm that audited the county's records. Investors added Peat Marwick last month to a pending class action.

In the aftermath of the 1980s fiascoes, accounting firms found it cheaper to settle lawsuits than to fight them, said Art Bowman, editor of Bowman's Accounting Report, an industry trade publication in Atlanta.

"Now they've found that an even cheaper way is not to have the client in the first place," he said.

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They've also taken other steps. They have transformed their firms into limited liability partnerships to protect partners' individual assets from lawsuits. They have focused less on auditing and more on consulting services. And they are backing the Republican Congress' tort reform legislation, which would limit lawsuits against them.

"Given the litigious environment, we've been looking at who our clients are, both current ones and potential clients. It is crucial if we are to reduce risk," said Philip Peller, managing director of Arthur Andersen's worldwide audit practice.

The risk of being exposed to a lawsuit seeking damages many times more than auditing fees generate simply isn't worth it anymore, said Robert Guido, vice chairman for audit services at Ernst & Young, the world's largest accounting firm.

"Also, we owe it to our other clients to represent honest, forthright clients," he said.

So large and small accounting firms alike have redoubled efforts to look more closely at current and potential clients. The Big 6 especially have been more cautious.

The major firms cut 27 public clients in the first six months of 1994 but got rid of 60 in the first six months this year, according to Public Accounting Report, an Atlanta trade publication.

The industry's total resignations grew from 58 in last year's first half to 99 in the first six months of this year.

Meantime, the Big 6 share of new clients dropped steadily from 51% in 1993 to 46% last year to 40% in the first nine months of this year, according to Accounting Today, a New York trade publication.

"Litigation and liability have become high costs," said Harold S. Schultz, managing partner of Coopers & Lybrand's Newport Beach office. "It has to do with shareholders losing money, not with the quality of the audits."

Many would argue, though, that some so-called independent auditors are aware of problems and are covering them up, a recurring and sometimes accurate theme in litigation.

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