Official Committee Unsecured Creditors of Allegheny Health Education and Research Foundation v. PricewaterhouseCoopers, L.L.P.

AUDITOR LIABILITY

Official Committee Unsecured Creditors of Allegheny Health
Education and Research Foundation v. PricewaterhouseCoopers, L.L.P., No.
2:00cv684 (W.D. Pa. Jan. 17, 2007)

The creditors of the bankrupt Allegheny Health Education and Research Foundation
("AHERF"), acting on behalf of the AHERF estates, filed suit against
the accounting firm PricewaterhouseCoopers ("PWC"). The suit alleged,
among other claims, aiding and abetting breaches of fiduciary duty and professional
negligence. The creditors sought to recover monetary damages for PWC’s role in
auditing AHERF’s financial statements for fiscal years ending in 1997 and 1998.
The creditors alleged that PWC violated accounting standards in auditing AHERF’s
statements for the relevant years and, despite these violations, issued AHERF "clean
opinions." PWC responded that they were given inaccurate financial statements
by AHERF management and that these materially misleading financial statements
proved that management, and not the auditors, was at fault. PWC moved for summary
judgment.

The federal District Court for the Western District of Pennsylvania agreed
with PWC and granted the motion. In doing so, the court utilized the common
law doctrine of in pari delicto, meaning "in equal fault." This doctrine
prevents a party like the creditors from asserting a claim against a defendant,
such as AHERF, when the suing party bears fault for the claim. The court found
that AHERF management knowingly presented false financial statements to PWC
and that these managers were acting on behalf of and within the scope of their
employment with the AHERF corporation. The court further recognized that the
creditors were suing on behalf of the AHERF estate, i.e., the corporation.
As such, the court held that the creditors and PWC were "in equal fault," which
prohibited the AHERF creditors from recovering from PWC. Notably, the court
rejected the creditors’ argument that the personal benefit AHERF management
derived from misrepresenting financial statements prevented the application
of the equal fault doctrine. The court held that, notwithstanding personal
benefit, if management’s illegal actions benefitted the corporation in any
way, then the creditors would be barred from asserting the personal benefit
exception. In this case, since AHERF continued to acquire hospitals and physician
practices in the years in question, thereby adding income streams, the court
ruled that the corporation had received not insubstantial benefits.