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February 2, 2010

Court rulings provide comfort, but threat remains

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 Seidman.

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 relationship’.

Parmalat saga

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 auditors.

Liability reform

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 says.

 

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