Laventhol & Horwath, the nation's seventh-largest accounting firm, filed for bankruptcy protection this week under the weight of lawsuits seeking damages for allegedly faulty audits.
The firm filed a Chapter 11 bankruptcy case in U.S. Bankruptcy Court in New York, said Jaimie Walthour, a clerk in the court. Under Chapter 11 of the U.S. bankruptcy code, a company seeks to reorganize its operations while it remains in business."A series of tragic circumstances brought this proud firm to this sad day," Robert Levine, the firm's executive partner and chief executive officer, said Tuesday.
Levine blamed the collapse on high litigation costs and the increasing number of lawsuits being filed against accounting firms. The lawsuits were filed primarily by businesses challenging audits or by shareholders contending they received faulty financial information.
The company reportedly had to pay nine creditor banks at least $30 million last year, of which only $18.5 million was covered by insurance, over its auditing of the Grabill Corp. of Chicago.
Laventhol's audits of Jim Bakker's PTL ministry are the subject of an ongoing trial in Charlotte, N.C.
"Most accounting firms are suffering from high litigation costs and our firm is no exception," Levine said on Tuesday. "Because of the raised expectations of plaintiffs and the popular misconception of auditors as all-seeing and all-knowing, the number of lawsuits against accounting firms has skyrocketed."
The firm had 4,200 employees - 360 of which were partners in the firm - in its 50 offices across the country. Laventhol reported $350 million in domestic revenue last year.
Response in the firm's offices nationwide was diverse.
"We will close," said Nick Iacuzio, department head of accounting and auditing for the firm's Boston office, which let its 160 workers go. "It's very devastating, there's a lot of sadness and grief."
Offices in Ohio, Connecticut and Philadelphia also folded, but partners and senior executives in the Kansas City, Mo., office say they plan to open a firm of their own. Stanley H. House, managing partner in Kansas City, said the new firm will be known as House, Park, Morriss & Co.
In Tampa, Fla., two Laventhol partners have already set up their own firm, Aidman, Piser, and Co.
"It's certainly very hectic right now, but we've gotten enthusiastic support from our clients," said Philip C. Piser, who is setting up the firm with Terry Aidman. They previously headed Laventhol's audit and tax practice departments in Tampa.
The firm's 360 partners could remain liable for debts created by the national firm, said Leslie D. Corwin, an attorney and partner in the New York City-based law firm, Morrison, Cohen, Singer & Weinstein.
Once assets are sold off, whatever liabilities are left after the firm's insurance pays off becomes the responsibility of the individual partners, Corwin said.