March 2003

Attorneys Talk About Representing Accountants in the Era of Enron and Other Corporate Scandals

By David R. Dwares and Melissa M. McGuane

CPAs historically have ranked among the most trusted professionals. In a matter of just months, however, as a result of Enron and other corporate scandals, accountants joined the ranks of attorneys, politicians, and used-car salespersons at the bottom of Americans’ “Who Do You Trust?” list and as the butt of many a joke. Indeed, in a recent poll conducted by the BBC, road sweepers, pub landlords, and plumbers, among others, all were more respected than accountants. This fall from grace is similarly reflected in the news media, which increasingly refer to accounting as an industry rather than a profession.

For the foreseeable future this sudden attitude shift will continue to have a profound effect on the defense of accountants in malpractice actions. Attorneys know that public perception of accountants may play as much, or possibly more, of a role in the ultimate jury verdict as the specific facts of their case. Indeed, to ignore such public perceptions would do an accountant-client an extreme disservice. Is the appropriate response, then, simply to duck and try to find cover: that is, settle at any cost instead of risking a trial at which a jury consisting of members of this disgruntled and angry public holds the accountant’s professional and personal fate in its hands? Certainly not. Instead, efforts should be made to develop a better understanding of the true parameters of the current public perception of the accounting profession and then use that knowledge to craft a defense that lets the accountant be judged on the merits of the case at hand instead of the past actions of fellow professionals.

In addition to the recent corporate scandals, the drastic change in public opinion also can be explained by an increased awareness of the inherent conflicts of interest that arise when auditors also act as consultants for their clients. The hit that the accounting profession has recently taken is not unlike the gradual erosion in public confidence in other institutions, including the media, politics, and even the Roman Catholic Church. True, businesses and professions have weathered crises of confidence in the past. The savings and loan crisis in the 1980s comes immediately to mind. But the current blow to the accounting profession may be different. Jurors today feel personally touched by what has been happening. They have seen their 401(k) and 529 plans devastated by the actions of corporate America. This animosity seems to transcend gender, race, and class. With so many people now owning stock in some form or another, we are dealing not only with moral outrage, but also an equally powerful self-interest.

A recent survey conducted by the Minority Corporate Counsel Association and DecisionQuest gauged juries’ reaction to recent accounts of corporate misconduct. A startling 73% of individuals surveyed believe auditors do what their clients tell them, even if that recommended conduct is dishonest. A recent USA Today/CNN/Gallup Poll revealed that an almost identical percentage of respondents believe that large-corporation financial audits that hide damaging information about the company were at least “somewhat widespread.” An alarming generalization? Yes. Erroneous? Abso-lutely. Suffice to say, auditors have been reminded of the importance of professional distance between themselves and their clients. The difficult question, of course, remains: Where do accountants that may be accused of malpractice and the attorneys who provide their defense go from here?

Among the measures that the accounting profession has taken to address these problems and to restore favorable public opinion, limiting the types of consulting services accounting firms may offer to companies whose financial statements they audit is favored by the AICPA. The Sarbanes-Oxley Act of 2002, among other things, provides for a new body, the Public Company Accounting Oversight Board (PCAOB), to be appointed by the SEC.

During the years it will take to rebuild the accounting profession’s public image, attorneys must accept the challenge posed by today’s climate. The lawyers who defend accountants must acknowledge and confront the public perception of the profession, and use this insight to improve the defense of their accountant clients. As with every successful representation, a recognition and careful consideration of a juror’s mindset is critical.

While the strategy to be employed in any particular case must depend on the unique facts presented, differentiation and humanization provide two places for attorneys to start. The average American’s idea of an accountant’s role in or with a corporation undeniably has been influenced by the Enrons and WorldComs. A recent Gallup poll indicates that a staggering 49% of those polled believe that accounting firms deserve “a lot” of the blame for recent corporate scandals, while 29% of those polled believe that accounting firms deserve “some” of the blame. Similarly, 70% believe that the practices that led to the collapse of Enron are widespread in other large corporations. The DecisionQuest survey reported that 80% of those polled agree that Enron and WorldCom are merely the tip of the iceberg. But the fact is that the overwhelming majority of accountants are not the paper shredders on the front page of the Wall Street Journal. In fact, those individuals represent only a small number within the profession. A successful defense strategy must separate the particular client, as well as the profession in general, from those tainted by scandal. Galina Davidoff, director of DecisionQuest’s Boston office, recommends differentiating a defendant from the generalized majority: “Find ways to present your client as more thorough, principled, and different.” In situations where the dispute is between a company and its accountant, she suggests that the current anti-business climate may make a jury receptive to an auditor’s claim that the company encouraged her to act in a dishonest way.

Similarly, attorneys must try harder than usual to humanize accountant-clients by reminding a jury of the education, expertise, and integrity of the profession. Attorneys should emphasize the effort and steps necessary to become a CPA. Detailing an accountant’s day-to-day tasks may also portray the accountant in a way that a jury can easily relate to. If possible, attorneys also may want to emphasize facts, if available, that establish the accountant’s independence from the client, and willingness to challenge actions or positions taken by the client.

Finally, perhaps now more than ever, presentation is key. “Attorneys must be attentive to the details and clarity of presentation,” Davidoff advises. “Put your themes and conclusions up front, otherwise a jury may perceive ambiguity as dishonesty.” If presented with a set of facts that will play directly into the current perception problem without any facts available to make a defense, prudence may suggest settling the case, even at a cost significantly more than would have been paid earlier.

As regulatory mechanisms are put into place, CPAs will probably regain the public’s confidence and rejoin the ranks of the trustworthy. Until then, however, attorneys must undertake representation of accountants in a manner that prevents the few bad apples from spoiling the bunch.

David R. Dwares is a partner in the Washington, D.C., office of Ross, Dixon & Bell, LLP, and may be contacted at
Melissa M. McGuane is an associate in the Washington, D.C., office of Ross, Dixon & Bell, LLP, and may be contacted at

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