Failure of Deloitte talks raises spectre of ruin: Record professional negligence settlement with US government feared over savings and loan scandal

DELOITTE & Touche, the US arm of the international accountancy firm Deloitte Ross Tomatsu, could be forced into a record-breaking professional negligence settlement following a collapse in negotiations with the US government.

Talks appear to have broken down between the accounting firm - which is represented in the UK by Touche Ross - and US bank regulators over Deloitte's role in the American savings-and-loan scandal. This has prompted speculation that Washington is pressing for an unprecedented payment from the auditors to settle the charges.

The Resolution Trust Corporation, the US government agency handling the clean-up of the dollars 500bn savings- bank fiasco, is now seeking more than dollars 1.4bn in damages from Deloitte, the latest of a series of firms accused of having misled regulators as to the health of a half-dozen of the most mismanaged thrifts.

Some predicted the damages could dwarf the dollars 400m paid last year by Ernst & Young, another of the big six audit firms.

While the RTC has settled out-of- court with each of the firms it has accused of professional negligence for their work with the failed banks, accounting experts say the collapse of talks in cases as advanced as Deloitte's suggests the agency is demanding a huge settlement.

Deloitte's partners' capital totals more than dollars 450m, and some analysts said that even an out-of-court settlement could threaten the firm's survival.

Neither Deloitte nor the RTC would confirm a breakdown in the talks yesterday, although the agency did say that it had added six more lawsuits to the eight cases outstanding against Deloitte.

The savings banks audited by Deloitte in the mid-1980s all later collapsed, costing US taxpayers billions of dollars in compensation to depositors who lost their savings.

The chairman, Michael Cook, has said the firm is holding settlement talks with bank regulators. Mr Cook also said 'a settlement may never take place, or it may, even though these (additional) suits have been filed', according to a spokesman yesterday.

At the time of its settlement against E&Y, which gave clean audits to four of the most corrupt thrifts, the RTC's lawyers were expected to win at least dollars 1bn worth of damages from the firm. That settlement, though vast, angered a number of US legislators, who complained that malpractice insurance covered 75 per cent of that amount, leaving each of E&Y's partners to pay less than dollars 8,000 in actual damages, much of which was tax deductible.

Auditors in the US earn an average of dollars 200,000 a year, and did considerably better at the height of the S&L scandal. Despite the payment, the firm's chairman, Ray Groves, says Ernst & Young's financial future remains sound.

While Deloitte's partners are covered by similar 'errors and omissions' insurance, accounting analysts said another huge payout could threaten the joint pool operated by the big firms in the US. The threat of an unfavourable judgment would bring considerable pressure on Deloitte to settle the charges.

While the breakdown in talks does pose serious questions about the firm's future, industry officials believe it is more a case of brinkmanship by both the RTC and Deloitte, which ranks as America's third-largest accounting firm.

The RTC is unlikely to drive Deloitte into bankruptcy, but it has shown considerable ruthlessness in past S&L liability cases, at one point freezing the assets of a big New York law firm, Kaye, Scholer, which eventually paid dollars 40m to settle its malpractice charges.

The six big international accounting firms recently disclosed that defending themselves against professional liability claims cost them 12 per cent of their total 1992 revenues, a sharp increase over the 9 per cent they paid out the year before.