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BDO International escapes liability for mistakes of member firm

June 2009

In a case closely watched by the accounting profession, a jury took only one hour to render a verdict in favor of BDO International (now known as BDO Global Coordination B.V.), saving that company, the umbrella organization of the BDO network, from huge vicarious liability for the acts of one of its member firms, BDO Seidman.  Earlier in the week, the judge dismissed the claim for punitive damages against BDO International saying that the evidence could not support such an award.  On Thursday, June 18, 2009, the jury found that BDO Seidman was not BDO International's agent, and thus BDO International is not liable for BDO Seidman's mistakes.  As a result, many networks and associations concerned about vicarious liability for the acts of member firms can now rest a little easier.

 

The underlying dispute involves BDO Seidman's audits of a financial services company, E.S. Bankest, backed by Portugal-based Banco Espirito Santo.  E.S. Bankest perpetrated a massive fraud, which involved issuing fraudulent financial statements.  The principals of E.S. Bankest were convicted on federal charges relating to the fraud and were sentenced to up to 20 years in prison.

 

BDO Seidman was engaged by E.S. Bankest to provide audit services.  According to the lawsuit by Banco Espirito Santo, BDO Seidman improperly failed to uncover the fraud in performing its audit.  In addition, Banco Espirito Santo sought to hold BDO International liable for the acts of BDO Seidman.  In 2007, the trial court dismissed the claim against BDO International and the trial against BDO Seidman proceeded to a jury verdict.  The jury found that BDO Seidman was "grossly negligent" and awarded $170 million in compensatory damages and $351 million in punitive damages.  That verdict is on appeal.

 

The 2007 dismissal of BDO International from the case was appealed by Banco Espirito Santo.  The dismissal was reversed based on the appellate court's determination that there were factual issues to be resolved regarding whether BDO Seidman was BDO International's "agent," leading to the trial that was concluded June 18, 2009.  In the trial, Banco Espirito Santo sought to hold BDO International liable for the acts of BDO Seidman, arguing that BDO International had the right and duty to ensure quality audit services.  According to Banco Espirito Santo's attorney, BDO International had the right to control how BDO Seidman does its audits and how BDO Seidman presents itself to the public.  Further, BDO International could expel BDO Seidman from the network if certain standards were not met.

 

BDO International opposed the claims explaining that BDO International merely performs administrative functions for the BDO network of firms, has only a handful of employees, and does not share in the profits of the member entities.

 

After only one hour of deliberations, the jury returned a verdict in favor of BDO International.  This verdict, and the judge's decision earlier in the week dismissing the claim for punitive damages, is a complete victory for BDO International.  Prior to the ruling and subsequent verdict, BDO International was facing more than $500 million in exposure for the compensatory and punitive damages assessed against the member firm.

 

Although this is an important case in the evolving law on vicarious liability for accounting networks and associations, it should not be viewed outside its limited applicability.  This case was litigated in state court in Florida and applied Florida law on the issue of principal-agent relationships.  In a broader sense, however, the case suggests many accounting firm networks can breathe easier knowing that a properly structured organization, with limited control over member firms can avoid liability for the mistakes of the member firms, and perhaps more importantly, juries can overlook the similar names and render correct verdicts.

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