Testimony

Testimony before the Pennsylvania House Republican Caucus on Civil Justice Reform

Presented by Eric Wallace, CPA

December 3, 2007

Good morning, Representatives Everett, Schroder and Turzai and members of the House Republican Caucus. Thank you for the opportunity to present testimony on behalf of the Pennsylvania Institute of Certified Public Accountants. My name is Eric Wallace, and I am a partner with the Pittsburgh CPA firm of Carbis Walker LLP and the president-elect of PICPA.

PICPA represents more than 19,000 CPAs in business and industry, public practice, government, and education. Our members provide auditing and accounting services to individuals, not-for-profit organizations, and employers of all sizes; we advise clients on state, federal, and international tax matters; and we prepare income and other tax returns for an extensive number of state taxpayers.

As a member of Carbis Walker’s construction and real estate services team, I have provided testimony for construction-related cases in venues such as bankruptcy, district, and local courts in various states concerning tax and accounting issues.

PICPA has been strong advocate of civil justice reform in Pennsylvania for several years. For example, as a member of the Pennsylvania Civil Justice Coalition, we sought relief in an unfair judicial system that consistently levied disproportionate punishments on “deep pocket” defendants, including many of our member CPA firms. By speaking before your caucus this morning, we in the accounting profession hope we are continuing to forge ahead in our effort to change state law and establish a more balanced civil justice system.

My testimony this morning will focus on the effect of the doctrine of joint and several liability on business in the Commonwealth –in particular, the accounting profession.

Speaking as a CPA, I can attest that over the past decade in Pennsylvania, the doctrine of joint and several liability has caused lawsuits alleging professional malpractice to escalate, especially against my profession. While it is certainly true that CPAs perform audits on company accounts, what the general public – potential jurors – do not understand is the strict regulation of the accounting profession in overseeing this critical process, nor the importance of “auditor independence.” 

An audit is a report meant to lend credibility to a company’s financial statements. However, an auditor can only examine the records given to him or her by the management of that company, in what is presumed to be good faith. The auditor is not an investigator and cannot necessarily compel the party being audited to furnish all of the files relevant to the audit.

To illustrate how liability cases are often unjustified, imagine that you are a CPA or CPA firm performing an audit of Company A’s financial statements. Then imagine that this company becomes insolvent or encounters serious financial difficulties for reasons entirely unrelated to the audit work you have done for them. Under joint and several liability, investors or creditors filing litigation against Company A to recover lost monies can seize the opportunity to include you – the accountant or firm (often the “deepest pocket” available) – in the suit because of your tangential role as the issuer of the company’s audit report. As Company A is bankrupt, or has no available assets, you are left unfairly bearing fiscal responsibility for the majority, or entirety, of the damages claim.

Taking your “auditor independence” into consideration – and that violating that trust while performing and audit can result in the suspension or revocation of your CPA license – you can no doubt see why holding an auditor or firm disproportionately liable in a case such as I outlined is so often a miscarriage of justice.

This is just one example of the myriad reasons for which the CPA profession is a staunch proponent of civil justice reform in this state. Reform is long overdue, and is obviously needed by both the business community and the Pennsylvanians we serve.

In closing, PICPA commends you for taking the time to listen to this panel group of professions and industries, and the unfair burden felt by each under the doctrine of joint and several liability.

Thank you, and I will be happy to answer any questions you may have.