Accountants Professional Liability Scorecards and Commentary

1. Accountants Professional Liability Scorecards and Commentary Mark Cheffers,Audit Analytics, CEO Robert Kueppers,Deloitte LLP, Senior Partner, Global Regulatory & Public Policy September 19-20, 2013 ALI CLE - Accountants’ Liability Conference

2. Liability Exposure • Managing Current Case Exposures • Large Settlements • Historical and Current Cases • Madoff/Ponzi Cases • Credit Crisis/Subprime Cases • Other Federal Class Actions • Financial Restatements • Going Concerns

3. Expanding Theories of Auditor Liability • Auditor as…… • Global Firm Guarantor (vicarious liability) • Guarantor in Client Bankruptcy (Trustee cases) • Third Party Investee Investigator • Predictor of Future Business Failure (going concern) • Fidelity Bond/Fraud Guarantor • Aider and Abetter in Fraud • Arbiter of the Complexity of Standards

4. Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidmen. In 2007, a Florida state jury in the BancoEspirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.

5. Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidmen. In 2007, a Florida state jury in the Banco Espirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.

6. Top 50 Accounting Malpractice Settlements as of August 2013 (in US $ Millions) Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidman. In 2007, a Florida state jury in the Banco Espirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.

7. Notable Exposures - From 2006: Current Status - Fannie Mae($76.5M KPMG) - Delphi Corp($38.3M DT) - American Int’l Group($97.5M PwC) - Tenet Health Care($65M KPMG) - REFCO($25M GT) - Dell Co($0.0M PwC) - Computer Assoc.($0.0M KPMG & EY) - UnitedHealth Group($0.0M DT) - AOL Time Warner($100M EY) - Parmalat($157.5 DT & 6.5M GT) - Tyco International($225M PwC) - HealthSouth($142.5M EY) - Freddie Mac($0.0M PwC) - Royal Dutch Shell($0.0M KPMG & PwC) - Dynegy($1.05M Arthur Andersen) - PNC Financial($9.08M EY) - Sprint($0.0M EY) - Nortel Networks(DT $0.0M ± in Ontario) - Doral Financial($0.0M PwC) Note: A strike-though indicates that the case was settled. The parenthetical provides auditor settlement amount in millions. Since this slide noted “Exposure,” a settlement value of $0.0 is used even if the auditor was never named in an action.

8. Notable Exposures - 2010 (excl. 2006 list) - E.S. Bankest/BancoEspirito - Satyam(PwC portion $25.5M) - Madoff(J. Griesa: feeder fund auditor $0.0) - New Century Financial(KPMG $44.8M) - Moody’s (Class Cert. denied; PwC not named) - UBS(EY not named; 10/26/12 dismissal appealed) - Royal Bank of Scotland(DT not named) - Goldman Sachs(PwC not named) - Blackstone Grp (Remanded, but DT not named) - Wachovia(KPMG $37M) - Merrill Lynch(Settled; No DT contribution) - Citigroup (KPMG dropped in consolidated complaint) - Bear Stearns(DT $19.9M) - Bank of America (PwC exposed) - Wells Fargo(KPMG not named) - Washington Mutual(D&T $18.5M) - Sallie Mae(PwC not named) - Royal Bank of Canada - SocieteGenerale(EY and DT) - State Street Corp(EY motion to dismiss denied) - Oppenheimer Funds(no auditor named) - Lehman Brothers (E&Y partial win) Note: a strike-though indicates that the case was settled or otherwise closed.

9. Federal Securities Class Action Litigation Summary Big 4 Auditors Note: The year displayed represents the year the action was filed with the court. The counts include all cases where an auditor was named as a defendant even if the case was subsequently consolidated. The list of Open Cases refers to the auditor, so if the auditor is terminated as a defendant, the case is listed as closed even if the case is ongoing for other defendants.

10. Top 14 Securities Class Action Defense Law Firms Representing Audit Firms (by number of cases from 2000 to August 2013) Notes: 1) Some cases may involve more than one Big 4 defendant. A total of 279 law firms represented audit firms from 2000 to August 2013. For a complete list contact Audit Analytics. 2) This list does not include Heller Ehrman LLP, which dissolved.

11. First Stock Option Backdating Litigation:Symbol Technologies • Securities class action filed in New York Eastern District Court on 3/5/02 • In related 6/3/04 Accounting & Auditing Enforcement Release No. 2029, the SEC charged an executive, in part, as follows: “manipulated stock option exercise dates to enable select senior executives, including himself, to profit unfairly at the company's expense. Rather than use the actual exercise date as defined by the option plans, Goldner instituted, without board approval or public disclosure, a practice of using a more advantageous date chosen from a 30-day "look-back" period so as to reduce the cost of the exercise to the executive. To create the false appearance that these exercises occurred on the selected dates, Goldner had his staff backdate transactional documents and use the phony exercise dates in the forms on which the executives reported their acquisitions to the Commission and the public.”

12. Stock Option Backdating Cases: An Overview(Federal Court Cases) - Total Stock Option Backdating Cases: 181(consolidated from 206 cases) - Specifically Asserting Backdating: 158 - Cases Resulting in a Financial Restatement Addressing Backdating and/or Deferred Stock-Based Issues: 23 - Subset of the 181 Cases Filed by the SEC: 32 (16 naming only individuals) - Subset of the 181 Cases Filed as Derivative Actions: 74 - Subset of Cases Naming Auditor as Defendant: 13 - Law Firms Representing Defendant Auditors: 15

13. Stock Option Backdating Federal Court Cases Where Auditors were Named as a Defendant # Cases Filed: 181 # Auditors Presently Named: 4 (13 cases)

14. Stock Option BackdatingCases Top Accounting Firm Settlements Notes: 1) The cases above concerned multiple assertions and the portion of the settlement attributable to the stock option backdating conduct is unknown. The settlements by audit firms for other stock option backdating cases were less than $1,000,000. 2) The Arthur Andersen case was filed on May 6, 2002 in the California Southern District Court and was identified as a stock option backdating case by using the Audit Analytics Restatement database 3) The prior slide indicates that D&T was not named as a defendant in a stock option backdating case. In an apparent contradiction, D&T is listed above with a settlement. D&T paid the settlement after filing a motion to voluntarily intervene in a stock option backdating case for the limited purpose of objecting to the proposed settlement and thus listed above because of D&T’s connection to the matter as an intervenor, not as a defendant.

15. Stock Option Backdating Cases Law Firms that Represented Defendant Audit Firms # Cases Filed: 181 # Auditors Named: 4 (13 cases) Note: In some cases, auditors were represented by more than one law firm. Although listed above, Howery LLP dissolved effective March 15, 2011.

16. The Total Foreign Indefinitely Reinvested Earnings (IRE) Balances Held by the Russell 3000 Increased by 70.3% Over the 5 Years from 2008 to 2012. Source: Foreign Indefinitely Reinvested Earnings: Balances Held by the Russell 3000: A 5-Year Snapshot, published May 2013 by Audit Analytics.

17. Top 20 Companies with Foreign Indefinitely Reinvested Earnings (IRE) Source: Foreign Indefinitely Reinvested Earnings: Balances Held by the Russell 3000: A 5-Year Snapshot, published May 2013 by Audit Analytics.

18. Quality of Financial Reporting – During the Last Four Years, the Quantity of Total Restatements Appears to have Leveled Off. 2012 Restatements 713 Unique Filers 768 Restatements Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

19. The Quantity of Restatements from U.S. Accelerated Filers has Increased for the Third Straight Year. Restatement Count From 2009 to 2012 • U.S Accelerated Filers Increased from 153 to 245 • U.S Non-Accelerated Filers Decreased from 397 to 386 Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

20. Although the Number of Restatement Disclosures Slightly Decreased, the Number Disclosed by Companies Traded on the NASDAQ Notably Increased. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

21. Restatement Analysis Largest Negative Restatement by Year Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

22. The Highest Negative Restatement for 2012 Represents the Third Lowest Negative Restatement During the Last Eleven Years. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

23. Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally Low in Severity. 1. Average Cumulative Impact on Net Income per Restatement (companies on Amex, NASDAQ & NYSE) • Calendar Year 2012 Experienced an Average Negative Impact of $5.8 Million, SubstantiallyLower than 2006 and Years Before. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

24. Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally Low in Severity (continued). 2. No Impact on Income (Companies Presently on Amex, NASDAQ & NYSE) • In 2012, a Total of 157 out of 335 Restatements (46.87%) had No Impact on the Income Statement. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

25. Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally Low in Severity (continued). Average Number of Days Restated • The Average Restatement Period Peaked in 2005. • Year 2012 Experienced a Slight Uptick, but the Time Period is nevertheless Short Compare to the Years from 2003 to 2007, Inclusive. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

26. Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally Low in Severity (continued). 4. Average Number of Issues per Restatement • A Taxonomy of Over • 50 Issues Monitored • and Graded • In 2012, the Average Number of Issues • Implicated in a Restatement was only 1.38 Financial Accounting Issues, the lowest during the 12 years under review. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

27. In 2012, the Debt, Quasi-Debt, Warrants & Equity (BCF) Security Issues Declined to Converge with the Other Top Issues to within a Percentage Window between 8% and 15%. Top Restatement Issues between 2001 and 2012 Note: One reason for the increase in debt related restatements in 2010 and 2011 was the publication of new guidance by the Emerging Issues Task Force (“EITF”). EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” became effective on January 1, 2009. Before EITF 07-05, companies treated warrants (stock) as equity, but after EITF 07-95 they were to be treated as a liability. Since the EITF took effect on January 1, 2009, many companies that did not adhere to the guidance in 2009 found themselves restating their financial statement in 2010 in order to reclassify warrants as a liability.

28. Revision RestatementsThe percentage of restatements that were Revision Restatements, restatements revealed in a periodic report without a prior disclosure in Item 4.02 of an 8-K, has trended higher since thedisclosure requirement first came into effect in August of 2004 and reached the value of 64.69% in 2012. Note: A registrant is required, within four business days, to disclose in an 8-K, Item 4.02 when it is determined that a past financial statement should no longer be relied upon. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

29. Reissuance RestatementsAlthough the number of restatements disclosed by U.S. Accelerated Filers increased for the third straight year (see Slide 19), a focus on Reissuance Restatements shows that the number of Reissuance Restatements did not experience the same increase. Note: A registrant is required, within four business days, to disclose in an 8-K, Item 4.02 when it is determined that a past financial statement should no longer be relied upon. Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.

30. Going Concerns(Percentage of Auditor Opinions Qualified with a Going Concern Assumption) Source: Going Concern Reviewpublished September 2013 by Audit Analytics. Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the opinions expected and 93.2% of the GCs expected).

31. Going Concerns(Number of Auditor Opinions Uncertain of its Going Concern Assumption) Source: Going Concern Review published September 2013 by Audit Analytics. Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the opinions expected and 93.2% of the GCs expected).

32. Going Concerns Twelve Year Review Source: Going Concern Reviewpublished September 2013 by Audit Analytics. Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2012 (about 98.5% of the opinions expected and 93.2% of the GCs expected).

33. Going Concern Percentages(Breakdown by Market Status) Note: The market designation is based on the company’s status as of 7/8/13.  As compared to last year's slide, a number of going concerns shifted from OTCBB to Non-Tickered. This shift, in part, was due to the efforts of the SEC's Microcap Fraud Working Group to suspend the trading of registered shell companies. For example, this working group suspended 379 shells in May 2012 and an additional 61 in June 2013.  Not all suspended shells filed a going concern, but this effort would also discourage the creation of new shells. Source: Going Concern Review published September 2013 by Audit Analytics.

34. New Going Concerns by Year Number of Going Concerns (Year 2012 Estimated) Source: Going Concern Review published September 2013 by Audit Analytics. Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the opinions expected and 93.2% of the GCs expected).

35. Source: Going Concern Review published September 2013 by Audit Analytics. Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the opinions expected and 93.2% of the GCs expected).

36. Companies that Filed a GC for the Year then No GC the Year After (Classified by Outcome: Subsequent Improvement or Disappearance) This graph shows, for each fiscal year, the number of companies that filed a Going Concern (“GC”) for that particular year, but not the year after. A company can stop filing a GC for two reasons: (1) it files a clean audit opinion the next year or (2) it files no audit opinion the next year. The top number in the data above indicates the quantity of companies that improved their condition (filieda clean audit opinion the next year) while the bottom number shows the quantity that failed to file an opinion. For example, fiscal year 2007 received 997 GCs from companies that did not file a GC in 2008. The graph indicates that 200 companies filed a GC in 2007 and then filed a clean audit opinion in 2008. It also shows that 797 companies filed a GC in 2007 and then filed no audit opinion in 2008. Source: Going Concern Review published September 2013 by Audit Analytics. Note:The values for 2011 (GCs in 2011 that were not repeated in 2012) is based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the opinions expected and 93.2 of the GCs expected). Therefore, the 729 figure is inflated slightly because other opinions will come in for 2012.

37. Audit and Non-Audit Fees(2,408 Accelerated Filers) After Three Years of Steady Decline, Non-Audit Fess Appear to have Leveled Off at about 21% of Total Fees. Notes: 1)The research above is based on fees disclosed in SEC filings as of June 18, 2013. 2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17, 2013 that disclosed audit fees for each and every year displayed. 3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit plan, related fees, FISDI fees, tax related fees, other/miscellaneous fees. Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.

38. Non-Audit Fees(2,408 Accelerated Filers) During the Eleven Years Under Review, Accelerated Filers Paid the Second Lowest Amount of Non-Audit Fees as a Percentage of Revenue During 2012. Notes: 1)The research above is based on fees disclosed in SEC filings as of June 18, 2013. 2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17, 2013 that disclosed audit fees for each and every year displayed. 3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit plan, related fees, FISDI fees, tax related fees, other/miscellaneous fees. Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.

39. Audit Fees(2,408 Accelerated Filers) The Cost of Audit Fees as a Percentage of Revenue Experienced a Slight Uptick in 2009 (an Uptick Due to a Decrease in Revenue Rather than an Increase in Fees) Followed by Three Years of Decline. Notes: 1)The research above is based on fees disclosed in SEC filings as of June 18, 2013. 2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17, 2013 that disclosed audit fees for each and every year displayed. 3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit plan, related fees, FISDI fees, tax related fees, other/miscellaneous fees. Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.

40. Number of Auditor Attestation Filers(in Audit Fee Population of 2,408) Accelerated Filers Experienced a downward Trend in Audit Fees despite an Increase in the Number of Companies Required to Adhere to SOX 404(b). Notes: 1)The research above is based on fees disclosed in SEC filings as of June 18, 2013. 2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17, 2013 that disclosed audit fees for each and every year displayed. Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.

41. The Total Number of SOX 404 Adverse Auditor Attestations and the Number of Material Weaknesses Noted therein have Consistently Declined Since Year 1. Notes: 1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15, 2004. Source: Audit Opinions of Financial Controls:Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review, published June 2013 by Mark Cheffers..

42. The Total Number of SOX 404 Adverse Auditor Attestations and the Number of Material Weaknesses Noted therein have Consistently Decline Since Year 1. Notes: 1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15, 2004. Source: Audit Opinions of Financial Controls:Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review, published June 2013 by Mark Cheffers..

43. The Total Number of SOX 404 Adverse Management-Only Assessments and the Number of Material Weaknesses Noted therein have Not Displayed Any Significant Improvement Since Year 4. Notes: 1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15, 2004. 2) Non-accelerated filers were required to provide a management assessment (but not an auditor attestation) in their annual reports for the fiscal years ending on or after December 15, 2007. Year 4 is from Nov. 15, 2007 to Nov. 14, 2008, so Year 4 above is shortened by one month. Source: Audit Opinions of Financial Controls:Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review, published June 2013 by Mark Cheffers.

44. The Total Number of SOX 404 Adverse Management-Only Assessments and the Number of Material Weaknesses Noted therein have Not Displayed Any Significant Improvement Since Year 4. Notes: 1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15, 2004. 2) Non-accelerated filers were required to provide a management assessment (but not an auditor attestation) in their annual reports for the fiscal years ending on or after December 15, 2007. Year 4 is from Nov. 15, 2007 to Nov. 14, 2008, so Year 4 above is shortened by one month. Source: Audit Opinions of Financial Controls:Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review, published June 2013 by Mark Cheffers..

45. Of the 53 Restatements Disclosed by Russell 1000 Companies that also Had an Auditor Change, 5.7% (a Total of 3) were Detected, in Part, by the “Fresh Eyes” of the Newly Engaged Auditor. Note: The pie chart above is based on October 2011 research of all restatements disclosed since January 1, 2006 by a Russell 1000 companies (a 6-year aggregate population of 1,355 companies) that also experienced an auditor change since Jan. 1, 2005. Source: A Restatement Analysis of The Russell 1000 Companies: The Extent to which the “Fresh Eyes” of a Newly Engaged Auditor Provided Assistance in the Discovery of the Misstatement published February 2012 by Audit Analytics.

46. Audit Accounting System Rules Ethics Principles Pakaluk, Michael and Mark Cheffers, Accounting Ethics … and the Near Collapse of the World’s Financial System. (Sutton: Allen David Press, 2011) Image of three legged stool from the following website: www.clker.com/clipart-three-legged-stool-outline.html

47. Audit Analyticsprovides detailed intelligence research on all public companies and 1,500 accounting firms. Our data includes detailed • categorizations of issues and is considered by many professionals to be the best primary data source for tracking and analysis of the • following public company disclosures: • Sarbanes-Oxley Disclosures • Track Section 404 internal control disclosures and Section 302 disclosure controls. • Auditor Information • Know who is auditing whom, their fees, auditor changes, auditor opinions and more. • Restatements • Identify company restatements by type, auditor and peer group. Analyze by date, period and specific issue. • Legal Disclosures • Search all federal litigation by auditor, company and litigation type. Know who is representing whom. • Corporate Governance • Track director & officer changes, audit committee members, C-level executives and their biographies. • SEC Comment Letters • An extensive collection of more than 125,000 fully analyzed SEC Comment Letters indexed according to a taxonomy of 2,800 issues and rules. • Examples of Recent Assignments from Law Firm Clients • Identify all SOX 404 filings where the management assessment disagrees with the auditor attestation. • Discover examples of SOX 302 disclosures that identified and remediated the control weakness in the same reporting period. • List of all Revision Restatements (restatements filed without a prior 8-K, Item 4.02 disclosure) during or after 2007 and identify which of those restatements were disclosed by a company with an IPO during or after 2007. • Provide the SOX 302 and SOX 404 disclosure text from companies with an IPO during or after 2007 that subsequently filed a Revision Restatement. • Supply excerpts of SEC Comment Letters that discussed a Fin 48 with the phrase “change in estimate” or “correction of an error.” • Provide SOX 302 disclosure text from companies that engaged a Big4 auditor and filed a SAB 108 that noted a “change in estimate.” • Identify financial restatements that made adjustments in goodwill that also addressed issues regarding company acquisitions and accounts payable. Provide stock price history of companies that filed such restatements.