An empirical analysis of factors used by courts when deciding motions to dismiss Rule 10b-5 litigation against accountants

Kyleen Whitehead Hawkins, Louisiana Tech University


In recent years, the accounting profession has witnessed a proliferation in the number of suits filed against its members and a catastrophic increase in the magnitude of court awards to successful plaintiffs. However, there is very little empirical research that attempts to examine litigation related issues.

The objectives of this research are: (1) To identify factors courts use when deciding whether to dismiss Rule 10b-5 litigation against accountants; (2) To analyze the significant variables in terms of accounting practice and theory; and (3) To construct a profile of a typical Rule 10b-5 case against an accountant.

Information was extracted from 102 court cases. The information was coded and a probit model was constructed. The dependent variable of the model is a dichotomous "allegation dismissed/allegation not dismissed" while the independent variables relate to eleven factors identified through a review of relevant accounting and legal literature.

The resulting probit model is shown to be successful in discriminating between cases in which allegations against accountants are dismissed and those which are not. Factors found to be significant in the model include: (1) whether the accountant's client becomes bankrupt during or subsequent to the accountant's association with the client, (2) whether allegations of negligence are also asserted, (3) the existence of an alleged violation of GAAP and/or GAAS, and (4) whether the engagement in question is tax-related.

Insignificant factors include: (1) whether the accountant is accused of a primary violation or of aiding and abetting, (2) whether the case was tried in a district court or a court of appeals, (3) the relationship of the plaintiff to the accountant, (4) whether the case was a class action, (5) the size of the accounting firm, (6) whether the engagement in question was an audit, and (7) whether the engagement in question involved financial projections.

The most significant finding of this research is the lack of applicability of the deep-pocket theory in courts of law. Although the deep-pocket theory may be applicable to the original filing of the suit by the plaintiff, courts do not appear to view accountants as deep pockets when deciding motions to dismiss Rule 10b-5 litigation.