Failed audits are no basis for protective legislation. (Standard Chartered Bank PLC malpractice suit against Price Waterhouse) (Standard Chartered vs. PW: busted audit or legal lotto?)

By Leo Beus, Accounting Today  Published:  February 7, 1994

The Public Oversight Board of the Securities and Exchange Commission Practice Section of the American Institute of CPAs has made formal recommendations to the SEC and Congress in a report stating, “That the public interest requires remedial legislation” to protect “auditor’s exposure to liability.”

As support, the report referred to only two cases: Miniscribe/Coopers & Lybrand and Standard Chartered Bank vs. Price Waterhouse.

Interestingly, no one from the POB ever attempted to contact the plaintiffs or their representatives in either Miniscribe or Standard Chartered.

But even a brief review of either case demonstrates that the erosion of public confidence is created not by litigation, but by busted audits.

The Standard Chartered case stems from Price Waterhouse’s handling of audits in 1985 and 1986 for Arizona-based United Bank, which was acquired by London-based Standard Chartered in 1987.

For 12 consecutive years, financial statements audited by Price Waterhouse portrayed United Bank as one of the nation’s top performing banks in growth and income.

But during the 11-month Price Waterhouse jury trial, Standard Chartered put on evidence of audits fraught with negligence, omissions and misrepresentations. The jury returned a verdict in May 1992 for $338,053,768.

In winning Standard Chartered’s confidence during the acquisition, Price Waterhouse had claimed — in writing — that the firm had an “in depth familiarity and knowledge of [United’s] policies and procedures” and that the firm was the “recognized leader in bank accounting and auditing,” “widely recognized to be the quality firm,” and whose “reputation and expertise” is “second to none.”

Price Waterhouse also acted as “experts in accounting and auditing” for each of the three public offerings associated with the acquisition and consented to allow Standard Chartered to incorporate Price Waterhouse’s audit reports in those filings. …

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