Landmark vicarious liability court
rulings in favour of networks have provided some optimism for
accounting leaders in the past year.
US courts dismissed two cases, an attempt
to link ES Bankest damages to BDO International and the
long running Parmalat claim against Grant Thornton
International and Deloitte. Both cases failed to link the activity
of network member firms with global administration bodies
and this has given some comfort to network leaders.
“I don’t know that you would ever say we would no longer worry
about vicarious liability risk, but that decision helped ease our
minds a bit because we are on a path of global branding and it
makes our firms wonder if their risk is increasing and so on,” says
Crowe Horwath International chief executive Frank Arford. “So that
was very important to us, a positive development for us.”
Nexia International chairman Norbert Neu says
the Parmalat ruling was important in defining the liability
boundaries between network administration bodies and firms but
warns the profession must keep an “eagle eye” on this issue.
ES Bankest case
In June, BDO International was cleared of all
damages in a court case that sought to establish a link between the
Brussels-based administrative office and its US member firm BDO
A Miami jury found BDO International was not
liable for $170 million in compensatory damages for a judgment
awarded against its US member firm BDO Seidman. BDO International
was also cleared of $352 million in punitive damages in relation to
the same ruling.
The damages relate to a ruling that 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. In 2007, the court ordered
the mid-tier firm to pay $522 million in punitive and compensatory
damages, a ruling BDO Seidman is appealing.
The plaintiff in the case, Banco Espirito
Santo, had pursued BDO International by claiming BDO Seidman and
BDO International shared an ‘actual common law agency
In September, Grant Thornton International and
Deloitte’s global office were also cleared of any wrongdoing in
relation to the long running Parmalat case.
New York judge Lewis Kaplan dismissed the
claims against the two audit organisations and a third against Bank
of America. In his judgement, Kaplan noted that Parmalat and
Parmalat Capital officers had been acting within the scope of their
employment when they engaged in a massive fraud that ended in the
collapse of Parmalat. Since then, relatively small out of
court settlements have been put forward before the US courts that
would end the matter.
At the firm level, litigation is a threat and
a rise in the number of corporate failures has audit firms’ legal
teams on their feet.
Major frauds – Satyam in India and the Madoff
ponzi scheme in the US – led to high-profile lawsuits targeting
Deloitte global chief executive Jim Quigley
and BDO International chief executive Jeremy Newman point out the
number of claims against auditors is not as high as expected.
Quigley does not believe litigation will get
any worse this year but it will continue to be a problem for firms
until audit liability reform takes place.
“I hope that as we continue to evaluate the
role of the profession, the public policy discussion related to
liability will remain and we will be able to find a solution that
removes a threat that I believe is needlessly there,” Quigley