These White Shoes Are Splattered With MudBy
Accounting firms are restrained, buttoned-down places, right? You wouldn't know it from the vitriolic press releases flying out of accounting firm Coopers & Lybrand's headquarters. Stung by the latest in a series of professional liability suits, Coopers is rolling up its sleeves and punching back. Calling a suit filed on Aug. 17 by drugstore chain Phar-Mor Inc. a "desperate ploy" and "a blatant attempt to twist the truth," Coopers is waging a war of words--and plans to file a suit of its own.
No Big Six firm has emerged unscathed from the torrent of professional liability suits filed in recent years. But in an industry where image is everything, Coopers has been hit with a series of high-profile lawsuits (table).
In the latest twist, Phar-Mor says that because Coopers didn't follow generally accepted auditing techniques, it failed to uncover an alleged $10 million embezzlement by Phar-Mor employees, and failed to detect what Phar-Mor says amounts to $350 million in overstated net worth. Phar-Mor took a write-off for that amount, and after suppliers stopped shipping goods, filed for Chapter 11 protection on Aug. 17. The same day, Phar-Mor sued Coopers for compensatory and punitive damages. It also wants the accounting firm held liable for civil actions filed against the chain. On Aug. 19, Coopers announced that it planned to countersue, and that Phar-Mor management should get the blame.
PEER SYMPATHY. Unfortunately for Coopers, Phar-Mor's suit comes just as the firm was seeking to bolster its image. On Aug. 11, after a yearlong review, Coopers announced a "complete strategic repositioning" designed to focus the firm's far-flung business expertise into five business lines, streamline and rejuvenate management, and boost a flattening revenue stream.
Although the company emphasizes that its legal problems aren't behind the revamping, the suits surely haven't helped Coopers' image. Its largest legal judgment came in a malpractice suit filed by the bondholders of failed disk-drive maker MiniScribe Corp. Their suit charged that Coopers and others conspired to overstate MiniScribe's financial health. Coopers denies wrongdoing, but settled with MiniScribe bondholders in February for some $40 million, says Arthur W. Bowman, editor of the Atlanta-based newsletter Bowman's Accounting Report. Coopers lately settled a second suit filed by MiniScribe shareholders.
Then there was the well-publicized collapse of Silverado Banking, the Colorado-based savings and loan. While a complaint was never filed against Coopers in the Silverado case, the firm in June, 1991, agreed to pay the Federal Deposit Insurance Corp. $20 million over three years for its performance of Silverado audits. And Coopers is one of many defendants in an ongoing suit filed by the Florida Insurance Dept. on behalf of policyholders of the insolvent Guarantee Security Life Insurance Co., based in Jacksonville, Fla. Coopers is charged with breach of fiduciary duty, negligence, and breach of contract. It denies wrongdoing.
Coopers' peers can sympathize with its legal woes. The Big Six say they spent $477 million on litigation costs in 1991, up from $404 million in 1990. Why the leap? "The wall of invincibility around auditing firms has collapsed," says Richard D. Greenfield, senior partner in Greenfield & Chimicles, a law firm based in Haverford, Pa.
TRUER FOCUS. To adapt, Coopers, like many of its peers, is narrowing the focus of its business to niches where its practice is strongest, such as benefits consulting. "We needed to limit our focus to marketplaces where we wanted to compete, so that wherever we went, we had depth and quality," explains Coopers Chairman Eugene Freedman. It will also try to become more relationship-driven, by requiring all partners to have client responsibility. In the past, some 10% of Coopers partners did only administrative work.
Freedman says that the financial benefits of the repositioning will be "absolutely dramatic." Coopers could use a financial boost. Its revenues were close to flat from 1990 to 1991, at about $1.47 billion, after five years of double-digit growth, estimates Bowman. That's par for the course in the industry, thanks to the recession. "But partly, it's because the firm was in a transition of management and lacked a true focus," says Bowman.
Freedman says the changes have the support of his peers at Coopers. The partners' only question, he says: "How fast can we do it, Gene? " With revenues flat, litigation continuing, and the recession lingering, his best response might be: as fast as you can.
COOPERS' COSTLY CLIENT PROBLEMS SILVERADO BANKING After Colorado thrift collapsed in December, 1988, Washington blasted Coopers for not detecting shaky condition. To compensate, Coopers agreed in June, 1991, to pay the FDIC $20 million over three years MINISCRIBE Bondholders of failed computer disk-drive maker sued Coopers for not catching overstated results. Coopers settled out of court in Feb. for about $40 million GUARANTEE SECURITY LIFE INSURANCE Florida regulators, steamed after Jacksonville insurer went bust in 1991, filed suit against Coopers and others. Coopers said its accounting was by the book. Suit is pending PHAR-MOR Drug chain is suing Coopers for not unearthing fraud by senior Phar-Mor executives, who allegedly embezzled company funds and reported nonexistent profits DATA: BW