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Scapegoat litigation drains U.S. economy, study asserts.

Government and private lawsuits seeking damages from auditors, lawyers and investment bankers in connection with savings and loan failures will cause significant damage to the U.S. economy by raising the cost of business investment, according to a study by the American Tort Reform Association (ATRA).

Litigation against professionals is termed "scapegoat litigation" because, ATRA says, the targeted defendants are not the parties directly responsible for the financial losses. Under the rule of joint and several liability, parties that are minimally at fault, but have "deep pockets," may be forced to pay the entire settlement.

The study, The Economic Effects of Scapegoat Litigation, found such lawsuits will seriously impair U.S. competitiveness by raising the cost of equity capital by as much as 1.3% over the next five years. Small firms, the study concluded, will suffer disproportionately--with their equity financing costs rising as much as 2.4%.

The economic fallout of scapegoat litigation will reduce the overall size of the U.S. gross national product by an average of $17.8 billion annually between 1992 and 1996, the study concludes.

According to ATRA President Martin F. Connor, recent judgments, such as the $338 million judgment against Price Waterhouse for a disputed audit and the $150 million in settlement costs paid by two law firms and two accounting firms in the Lincoln Savings & Loan failure, ultimately will be passed through the economy. The Resolution Trust Corp. also recently filed a $400 million civil law* suit against Arthur Andersen & Co. alleging negligence based on its involvement with the now-defunct Benjamin Franklin Savings Association in Houston.

"The underlying question is whether it's in the public interest to destroy the accounting profession, and I don't think that's hyperbole,'' Connor told the Journal. "There's a misconception that nobody gets hurt by these awards because the insurance company pays," he added. "People forget that, in the end, consumers will bear the brunt of the higher premiums. The costs that are going to be imposed on society as a result of this litigation are astronomical."

The full study is available free of charge by writing the American Tort Reform Association, 1212 New York Avenue, N.W., Suite 515, Washington, D.C. 20005, or by calling (202) 682-1163.
COPYRIGHT 1992 American Institute of CPA's
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1992
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