Sunday, April 17, 2011
Courts have been reluctant to find that auditing firms can be primarily liable for misstatements contained in audited finanical statements. Recently, however, the 9th Circuit upheld plaintiffs' allegations of Ernst & Young's involvement in Broadcom's stock options backdating scheme from 2000-2006, in New Mexico Investment Council v. Ernst & Young LLP (9th Cir. Apr. 14, 2011). Reversing the district court, the Appeals Court held that plaintiffs' allegations of scienter were sufficient to state a claim. Plaintiffs' allegations centered around three events: (1) a large grant of options on May 26, 2000 for which EY was given no documentation; (2) options granted in 2001 during a period when Broadcom's compensation committee did not have a quorum due to the death of one of its members; and (3) EY's direct involvement in 2003 with corrective reforms to Broadcom's prior options practices.
The Appeals court rejected the defendant's argument that the allegations were no more than negligence and emphasized the duties that auditors owe to the corporation's shareholders and creditors and ultimately the investing public.