Litigation
Jul. 20, 2002
Firm Ignored Advice, Blames Accountant
SAN JOSE - The trustee for a bankrupt computer equipment leasing company is suing its former accountant, Deloitte & Touche, for signing off on audits that portrayed a rosy financial picture when the business was in fact failing.
Milberg Weiss Bershad Hynes & Lerach, whose shareholder lawsuits have made it the scourge of corporate America, represents the plaintiff. The lawsuit is not unprecedented, legal observers said, but the cause of action is rarely pursued and the case may be a harbinger of things to come in light of the scandals involving accounting firm Arthur Andersen.
The action was filed this week in Santa Clara County Superior Court.
"We fully intend to do more of these," said Reed R. Kathrein, a San Francisco-based Milberg Weiss attorney who signed the complaint.
The lawsuit faces several hurdles, including the fact that the complaint blames Deloitte & Touche for suspect financial reports that were prepared by Leasing Solutions Inc. officials. The accounting firm made recommendations to improve the company's financial reports and then is blamed in the complaint for allowing executives to essentially ignore its advice.
"It's a little unusual to see a lawsuit brought by someone who continued to ignore the advice," said Fred Lambert, a Hastings College of the Law professor who specializes in corporate law and bankruptcy issues.
The case, filed Monday, focuses attention on the way the company's computer equipment was valued at the end of its leases to corporate customers. The "residual value" of the equipment declined rapidly as technological advances rendered much of it obsolete, but company officials wanted to keep inflated values on the books, according to the complaint.
"From its extensive experience auditing high technology companies in the Silicon Valley area, the same area where Leasing Solutions was headquartered, Deloitte knew that the risk of inflated residual values ... was particularly high," the complaint says. Renner v. Deloitte & Touche, 809449.
Deloitte identified those issues in its audits during the mid-1990s, but Kathrein argues in the complaint that the accountants let the matter drop while claiming implementation of its recommendations was "in progress."
"Deloitte knew, however, that management was not properly implementing its advice to fix the issue, as it found the same issues continued to exist when it returned for each subsequent year's audit," Kathrein alleged.
The complaint also blames Deloitte for allowing company executives to account for a loan as a one-time sale that allegedly produced a cash gain in 1997. This accelerated Leasing Solutions' insolvency, Kathrein said.
These decisions had the effect of allowing Leasing Solutions to misreport its financial condition and run up more debt, which it now owes to creditors, Kathrein said. "Basically, Deloitte didn't do its job," he added in an interview.
Deborah Harrington, a Deloitte & Touche spokeswoman, said the firm had not been served with the complaint and would have no immediate comment.
Lambert said he was not surprised about the lawsuit, saying the bankruptcy trustee has a duty to enhance the value of the estate.
He said Deloitte & Touche is likely to argue that the company has unclean hands and that negligence - even if proven - did not cause any damages. "They can say [Leasing Solutions] was headed into the ground no matter what," Lambert said.
Lambert said the Arthur Andersen accounting scandal would encourage lawsuits in bankruptcy cases. "People will file them because they think they have a better chance of convincing a jury," he said.
Craiq Anderson
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