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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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