AICPA Files Briefs in Securities and Malpractice Cases




From time to time, the AICPA’s Office of General Counsel files amicus curiae (friend of the court) briefs in matters that could affect the profession. I would like to inform you of two such recent filings. The first was to the U.S. Supreme Court; the other was to the New York Court of Appeals, that state’s highest court.

In January 2007, the U.S. Supreme Court agreed to hear a case out of the Seventh Circuit, Tellabs v. Makor & Rights, Ltd., 437 F.3d 588 (7th Cir., 2006), to address an important and recurring issue in securities litigation:

Whether, and to what extent, a court must consider or weigh competing inferences in determining whether a complaint asserting a claim of securities fraud has alleged facts sufficient to establish a “strong inference” that the defendant acted with scienter (knowing fraud or recklessness), as required under the Private Securities Litigation Reform Act of 1995.

While the various circuits have adopted somewhat different views of the proper standard, all but the Seventh Circuit required the trial court to consider all inferences that could arise from the facts pleaded by plaintiffs—that is, those that are supportive of a finding of scienter and those that support benign explanations of the allegedly fraudulent conduct and tend to negate scienter. Indeed, some courts have held, for example, that the inference of fraudulent conduct had to be the “most plausible” inference from the facts in order for such inference to be “strong.”

Although this case did not involve an accounting firm, the AICPA, along with six accounting firms, realized the potential importance of the issue to the profession, and collectively filed a friend of the court brief. The brief argues that the plain language of the law requires that facts be pleaded in the complaint that are sufficient to give rise to a strong inference that the defendant acted with the required state of mind, and it follows that when the facts pleaded can give rise to an inference of innocent or even negligent conduct, those same facts cannot constitute a strong inference of scienter.

Numerous amicus briefs have been filed in support of the position advanced by the profession, including a brief filed by the United States which, like our brief, urged rejection of the standard adopted by the Seventh Circuit and the adoption of a very high pleading standard. The Supreme Court is expected to hear oral arguments on March 28 and a decision is anticipated by the end of June.

This brief was drafted on our behalf by Gibson, Dunn & Crutcher LLP—Theodore B. Olson, counsel of record, Scott A. Fink, Douglas R. Cox, Mark A. Perry and Minodora D. Vancea on the brief.

On Feb. 5, the AICPA and the New York State Society of CPAs moved the New York Court of Appeals for permission to file a friend of the court brief in Williamson v. PricewaterhouseCoopers LLP (Index No. 602106/04). We wanted to participate in this case because it involved applying the continuous representation doctrine to toll the three-year statute of limitations governing audit malpractice claims.

The continuous representation doctrine derives from decisions in most state courts that tolled (or extended) the statute of limitations for medical malpractice claims during the course of a continuous treatment by the doctor for the same ailment. The theory behind this doctrine was that courts felt patients should not have to decide between suing their doctor or permitting the doctor to continue treatment in the hope that any malpractice will be corrected. In later years, this concept was extended to lawyers representing clients with respect to continuous representation on the same matter. Both doctrines require continuous treatment/representation relating to the same condition or matter.

The Appellate Division (New York’s intermediate appeals court) issued a 3-2 decision that reinstated negligence claims against PwC, going back more than three years (New York has a three-year statute of limitations for malpractice). The court concluded that the continuous representation doctrine applied to the auditor-client relationship, thereby tolling the statute of limitations for the duration of the relationship. PwC appealed. The Appellate Division based its conclusion on the fact that since PwC reviewed the prior years’ audit workpapers in preparation for the next year’s audit, the representation was continuous.

Since this reasoning would toll the statute of limitations for as long as the same accounting firm performed the audit (presumably because continuing auditors always review prior-years’ workpapers) and effectively eliminate the defense, we felt that the profession needed to be heard on this issue.

We presented three arguments to the court against application of the continuous representation doctrine. First, unlike doctors and lawyers, independent auditors, by definition, do not owe fiduciary duties to their clients and so need to be treated differently.

Second, the doctrine only applies to continuous professional engagements relating to a specific purpose or project. We argued that each annual audit is discrete. We also noted that reviewing prior-year workpapers is part of GAAS for each separate engagement.

Finally, we described the complexity and judgment inherent in the audit process, which makes the litigation of stale audit-related claims particularly difficult. For that reason, fundamental fairness and judicial efficiency favor strict enforcement of limitation periods in audit malpractice cases.

The case is scheduled for oral arguments in the Court of Appeals on April 2. This brief was drafted on our behalf by Willkie Farr & Gallagher—Kelly M. Hnatt and Matthew P. Bosher on the brief. Both of the AICPA amicus briefs are available at


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