Don't dump auditing lawsuits-PCAOB's Gillan

By Jonathan Stempel

WASHINGTON (Reuters) - A board member of the U.S. auditing industry's watchdog on Tuesday rejected auditors' calls to be exempted from securities class-action litigation, calling their arguments a "red herring."

Auditors remain defensive in the wake of litigation spawned by malfeasance such as the collapse of Enron Corp., and the demise of the energy trader's auditor Arthur Andersen.

They say lawyers' and investors' litigiousness makes insurance more costly and difficult to obtain, and might jeopardize the existence of other top auditors.

"I disagree," said Kayla Gillan, who sits on the five-member Public Company Accounting Oversight Board (PCAOB), at the Reuters Regulation Summit in Washington. "It's a red herring. The biggest protection against liability is to do the work right."

Scrutiny of auditors intensified after adoption of 2002's Sarbanes-Oxley Act, which created the PCAOB. The act forced public companies to tighten oversight, and obligated their top officers to sign off on quarterly and annual reports.

Its adoption came amid a surge in class-action litigation a few years ago, spurred in part by scandals and a three-year bear market in stocks.

The surge has abated, with the number of federal class-action lawsuits falling 38 percent last year, said Stanford Law School and Cornerstone Research study.

Yet auditors fear that investors who claim to have been hurt may recover more as companies' market values -- and the potential for big losses -- rise.

"As the market caps go up, if you're 10 percent responsible, or 1 percent responsible, for a company that has an enormous failure, you're out of business," said PricewaterhouseCoopers' PWC.UL Chief Executive Samuel DiPiazza in an October interview.

In November, a blue-ribbon panel including DiPiazza and Deloitte Touche Tohmatsu DLTE.UL Chief Executive William Parrett, the Committee on Capital Markets Regulation, called for greater protection for auditors against lawsuits by shareholders who allege wrongdoing.

Gillan questioned any shifting of liability.

"I have a lot of problems in saying that one party ... should have better protections than anybody else," Gillan said, ... and if auditors are better protected against liability, that shifts the harm to investors and issuers."

While November's elections have raised expectations that a Democrat-controlled Congress might pass more shareholder-friendly legislation, Gillan said investors probably shouldn't look to Washington for a quick fix.

"I think our securities litigation system needs to be fixed in a holistic way, not a piecemeal way," she said. "My guess would be not much will happen with the current power balance we have here. The noise around over-regulation, with regard at least to auditors, seems to have quieted down."

(Additional reporting by Emily Chasan)