The $685 million fraud lawsuit against Deloitte and Touche in Baton Rouge highlights just how crucial--and controversial--a company's relationship with its auditor can be.

The local case is about who's to blame in the stunning failure of United Companies Financial Corp. Although it has drawn no attention in the national press, earlier, higher profile cases against Arthur Anderson, WorldCom, Enron and others already had heightened many business owners' grasp of the role of auditors.

Locally, companies public and private, large and small, say they are taking steps to better ensure their books are accurate.

Even though lawyer jokes now share time with wise cracks about CPAs, most of the closely held clients of Baton Rouge veteran CPA Bert Faulk are more open and responsive than ever to his firm's auditing advice.

"Recently we've found that management and owners are more interested in internal controls," said Faulk, a partner in Faulk & Winkler LLC. "People are more responsive to deficiencies we uncover, whereas a few years ago if you said this or that procedure was a major deficiency, they'd say, 'I'm not worried, I'm happy with Mary Sue doing the procedure.' "

Companies can pay a hefty price if things go wrong between management and the auditors, as is painfully clear in the Deloitte lawsuit. The suit is an expensive legal war between the court-appointed trustee for creditors of United Companies' bankruptcy and one of the nation's auditing giants.

Louisiana District Judge Janice Clark is hearing the case, which at press time was expected to last another two weeks, though even Clark quipped that she hoped the two sides would reach a settlement.

The Baton Rouge courtroom was packed with lawyers on day one, and even Gov. Mike Foster slipped in and watched some of it from the back row. Deloitte has rented office space near the court and installed high-speed Internet access for its legal team.

Trustee William G. Hays Jr. is the plaintiff, and he has a court-approved $1.7 million stash to fight. His attorney, Gene Groves, argued in his opening statements that Deloitte knew United Companies' skyrocketing fortunes were bogus because of the way management accounted for key financial transactions.

"Had they (Deloitte) spoken, the board would have said, 'No more ...'," Groves said.

In the end, Deloitte advised United to restate earnings to reflect a $605 million write off from years of losses on those deals. Co-counsel Leo Beus summed it up this way: "The watchdog never barked."

Deloitte attorneys quickly fired back. They say Hays is a professional plaintiff whose job is to find money for creditors.

Deloitte attorney Claire Babineaux-Fontenot trotted out Deloitte's three auditors who handled the United account in an apparent effort to drive home the point to jurors that if United Companies were duped, it would have to be these three unthreatening-looking Louisiana residents who did it.

Co-counsel Dan Kolb likened the case to suing a carpenter who is working on a house when a hurricane comes along and wipes out the whole neighborhood.

Audit savvy

Accounting professionals say the job of auditors is to verify a company's accounting. Auditors are responsible for expressing an opinion on the fairness of financial statements and ensuring that the company appropriately discloses how much risk it is undertaking, says Tim Louwers, associate accounting professor at LSU and past president of the local chapter of the Association of Certified Fraud Examiners.

"To come back and say the auditors didn't know how to run their business is an interesting approach," Louwers said.

Regardless of what happens in the case, local companies already are dealing with their auditors differently.

Public companies now routinely report quarterly earnings later than usual because they want to pass them around internally one more time to make sure everything's right, says Peter Ricchuiti, a Tulane University finance professor and a member of the board of directors of Amedisys Inc., a publicly traded Baton Rouge home health company.

On top of that, CEOs must sign off on financials, and audit committees are composed of more outside people.

"Those are all positive changes," he said.

The federal government and Securities and Exchange Commission regulators now control public company auditing while private company auditing is mostly unaffected.

Privately held companies do audits mainly to please their bank lenders. Barry Kilpatrick, who heads up Baton Rouge commercial lending for Whitney Bank, said he is as confident as ever in the validity of audits turned in by his privately held clients.

"We know most of the CPAs personally that our clients use," Kilpatrick said. "Most of the time we develop relationships with them. We have confidence in their numbers."

WAR OF NUMBERS

THE PLAYERS

A Delaware bankruptcy court appointed William G. Hays Jr. as litigation trustee in the failure of United Companies Financial Corp. of Baton Rouge.

Hays filed suit for $685 million against Deloitte and Touche, United's long-time auditor, claiming it misled and defrauded United management, prompting its demise.

THE ISSUES

United Companies was in the business of making risky, high-interest mortgage loans to people with bad credit. Starting in 1993, at the end of each quarter, United would bundle its loans and sell them on Wall Street as securities. Those deals generated cash to make more loans.

The lawsuit claims Deloitte misled United management, which in turn overstated profits from those deals, Deloitte's alleged motive? To make a killing on Wall Street from consulting fees on similar mortgage-backed securities deals.

BURNING QUESTIONS

* Did the actions of three seemingly unthreateniog accountants dupe a company into bankruptcy?

* Did Deloitte lose or destroy vital work papers that would have gone a long way to proving the case?

* Is Hays merely a desperate plaintiff attempting to get money from the only deep pockets left, namely, the auditors?

* Did United Companies simply go belly up because its industry was doomed?

Source: Staff research.

TOM GUARISCO covers telecommunications and utilities, retail, oil and gas, and insurance. Reach him at tguarisco@businessreport. com.

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