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Applicability of arbitration to audit engagements.

APPLICABILITY OF ARBITRATION TO AUDIT ENGAGEMENTS

A recent decision in California holds the promise of granting auditors immunity from lawsuits in certain situations. The case began when the controlling shareholder of the Federated and Atari Corporation Schwartz, and Atari Corporation retained Coopers & Lybrand to conduct an audit of Federated's September 30, 1987, balance sheet. Coopers was retained specifically to determine whether any balance sheet adjustments were necessary to value the transaction properly.

All three parties entered into a binding agreement requiring that the audit "be a conclusive determination of the matters covered" and "be binding upon the parties and shall not be contested by any of them." In the event of nonperformance by the parties, the nonbreaching party can obtain judgment "in any court of competent jurisdiction" and is entitled to costs and attorney's fees.

After Coopers issued its final report, the firm was sued by Schwartz. Schwartz alleged Coopers overstated balance sheet adjustments by $19 million, which caused Schwartz to pay $5 million to Atari. Coopers answered the lawsuit by contending that it acted as an arbitrator in this case and therefore was cloaked with the protection of arbitral immunity.

Coopers's motion to dismiss was rejected by the trial court. The firm appealed to the California Court of Appeals to determine whether it was entitled to arbitral immunity.

In this case the court did not believe that Coopers's agreement for a binding audit was equivalent to an agreement for arbitration. The court concluded that if arbitration is agreed to by the parties, arbitral immunity shall apply to valuations, appraisals and similar proceedings such as audits. However, it is clear that if an agreement is drafted appropriately with the consent of all parties, it will allow an auditor to benefit from arbitral immunity.

This important case has been petitioned for review to the California Supreme Court. (Coopers & Lybrand v. Superior Court, 260 Cal. Rptr. 713)
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Publication:Journal of Accountancy
Date:Dec 1, 1989
Words:315
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