Who’s At Fault? NY Court Ruling Shelters Auditors


A recent NY court ruling may have set the stage for greater auditor protection, following a stricter interpretation of the in pari delicto doctrine in situations in which undetected accounting frauds have resulted in corporate failure.

In Marc S. Kirschner, as Trustee of Refco Litigation Trust v. KPMG, LLP et al., the Court grappled with the oft-debated question of whether the doctrine of in pari delicto is an absolute bar to recovery against service providers (in this case, several accounting and law firms, among others).

The ruling will likely chill the enthusiasm that bankruptcy trustees often exhibit for pursuing outside auditors following financial reporting fraud-induced business failures. From the service providers’ perspective, this is a good result, as they often see themselves (with good reason, to be sure) as the "deep pockets" targets in situations in which they in fact (in their minds, at least) were victims, not perpetrators. From others' perspectives, however, the fear of such consequences served a socially useful purpose of keeping auditors and others "on their toes" in providing high quality services, particularly benefiting shareholders, creditors, and others (taxpayers, in the case of failures that ultimately become wards of the state, as has recently become common), who are the true victims of such frauds.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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