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Ernst & Young's woes mount with Accredo lawsuit

Ernst & Young, it would seem, gets no respite these days. The accounting firm, whose name has been dredged up repeatedly this year thanks to the Sprint Corp. tax shelter saga and HealthSouth Corp. accounting scandal, is now battling allegations of flawed accounting procedures on another front.

On Monday, drug distributor Accredo Health Inc. slapped Ernst & Young with a lawsuit seeking more than $53.3 million in damages and accusing the accounting firm of failing to properly determine reserves related to a specialty pharmaceuticals unit it bought last year. Accredo, which filed the lawsuit in Memphis, Tennessee, also fired the firm as its outside auditor.

In a statement, Ernst & Young said it was surprised by Accredo's actions and believes its work fully complied with all professional standards. It said it would defend itself vigorously.

The lawsuit is the latest in a fast-growing list of legal entanglements that have dragged Ernst & Young into the spotlight in recent months. While merely filing a lawsuit is not proof of wrongdoing, mounting legal woes present both a legal liability and a risk to Ernst & Young's reputation, particularly in the post-Enron world, accounting industry lawyers say.

“In this day and age it isn't just the money, it's also the reputational damage,” said Jim Rigos, a national director for the American Association of Attorney-CPAs who frequently defends accounting firms in court. “One of the reasons that Arthur Andersen went down was not just Enron. It was the fact that Enron was about the ninth chapter in a book that had a lot of sordid chapters.”

Earlier this year, former clients sued Ernst & Young for more than $1 billion for allegedly advising them to use illegal tax shelters. Soon afterward, the accounting firm was back in the hotseat for tax advice it sold to executives at telephone company Sprint. That advice is now being scrutinized by regulators.

Weeks later, Ernst & Young was back in the news, this time for its role as auditor of HealthSouth, the Birmingham-based operator of physical therapy and surgical clinics that the U.S. government accuses of deliberately overstating earnings by $2.5 billion over several years.

Last month, U.S. regulators suspended two Ernst & Young partners who audited the books of CUC International, the accounting scandal-tarred firm that preceded real estate and hotel company Cendant Corp.CD.N Last year, regulators accused the accounting firm of violating auditor independence rules by working too closely with its client, PeopleSoft Inc.PSFT.O , on a computer software product.

Part of the reason for the sudden spate of negative news dogging the firm is the rapid consolidation in the accounting industry. The collapse of Andersen has left only four large accounting firms in charge of vouching for the books of a vast majority of public companies, says John Eickemeyer, partner at legal firm Vedder, Price, Kaufman & Kammholz, who defends accounting firms and accountants. The shrinking number of firms has left each with a larger number of audits, and consequently, a larger share of lawsuits stemming from problem audits.

“As audit work becomes more concentrated, litigation will tend to become more concentrated,” Eickemeyer said. “Each firm may find itself being dragged into a larger number of these.”

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