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August 2, 2009updated 29 Apr 2022 12:52pm

BDO International ruling a good sign, but not an end to litigation

Accounting organisations should take comfort from a recent US court decision in favour of BDO International that may cause plaintiffs to think twice about launching similar cases, according to a legal expert. But accounting networks are not getting their hopes up.

Earlier this month, Miami court judge John Schlesinger cleared BDO International of paying $352 million in punitive damages and $170 million in compensatory damages awarded against its US member firm BDO Seidman in a landmark case in Miami, Florida. The case has been closely monitored by the accounting profession as it attempted to establish the legal line of control between ‘umbrella’ network administration bodies and member firms.

Jane Howard, a partner in London law firm Reynolds Porter Chamberlain, said the fact that the decision suggests the court was more concerned about whether the umbrella organisation was getting involved in how the individual member firm conducted its audit work — rather than any theoretical control conferred by its constitution — was positive for umbrella organisations (which are typically administrative co-ordinating entities).

“I think what this illustrates is that on its own [control] should not be a basis for liability. It won’t stop people having a pop but the key is not to intermeddle with the actual work that is being done for clients by member firms,” she said.

The case centred on ES Bankest, a company set up by Portuguese bank Banco Espirito Santo (BES), which collapsed in 2003. Its two founders were jailed for a fraud calculated by investigators at $170 million.

In 2007, a Miami jury found BDO Seidman was grossly negligent in its ES Bankest audits between 1998 and 2002 and failed to detect a fraud that led to the bankruptcy of the Miami financial services company. The court ordered the mid-tier firm to pay $521 million in punitive and compensatory damages, a ruling BDO Seidman has appealed.

BES also pursued BDO International, now known as BDO Global Coordination, claiming the two entities shared an ‘actual common law agency relationship’ and the international parent should be vicariously liable for BDO Seidman’s acts.

“I think [the result] may cause some of the plaintiffs to think twice, their lawyers will have to work harder to find the sort of evidence that would be needed to form the basis for liability,” said Howard.

While she does not think it will dissuade plaintiffs from continuing to launch legal challenges, the BDO decision may lead to more early dismissals of actions against accountancy umbrella organisations if there is no evidence to show an element of control in a particular audit, Howard said.

Factually different

BDO International chief executive Jeremy Newman said other firms should not read too much into the result.

“At the end of the day it dealt with a particular network with a particular set of facts. Everyone’s structure is slightly different and the facts are slightly different so I’m sure lots of people will breathe a sigh of relief, but I don’t know how realistic it is for them to do that,” he said.

“I don’t think, unfortunately, this is the end of litigation against networks.”

Newman was quick to point out there were significant differences between BDO International’s case and the current Parmalat case involving Grant Thornton International and Deloitte, and PricewaterhouseCoopers’ involvement with Satyam.

In particular, this case was based on US clients dealt with in the US, in other cases they deal with global clients being dealt with in a number of jurisdictions, he said.

Newman also pointed out that BDO Seidman is still appealing the damages claim lodged against it and there is also the possibility BES will appeal the Miami jury’s recent decision.

Grant Thornton International is wary of drawing too many conclusions for its case involving Parmalat.

“The BDO and Parmalat cases are factually different and we have not had an opportunity to evaluate any impact of the BDO International verdict on the case against Grant Thornton International. We remain confident that Grant Thornton International will ultimately be vindicated,” the network said.

Nicholas Moody

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