I usually stick to commenting on the Big 4, but I was struck by a comment made by Christopher Ames over at his blog. He mentioned that BDO had been bucking the trend and fighting instead of settling. According to him and the WSJ, BDO had taken six cases to trial in the last twelve years and won all of them.

Looks like, unfortunately, they’ve “bet the farm” for the last time.

BDO Seidman loses 1st phase of court battle

“In a verdict that could have severe consequences for BDO Seidman, a Miami jury on Friday decided the world’s fifth largest accounting firm was negligent in failing to detect a massive fraud that cost a Portuguese bank $170 million.

Banco Espirito Santo had sued BDO Seidman in 2004 over the collapse of a financial services firm, E.S. Bankest, that the bank helped start. BDO Seidman was E.S. Bankest’s auditor for seven years.

The Miami-Dade Circuit jury found that BDO Seidman committed gross negligence, meaning the firm acted with reckless disregard of its duties. The finding allows Espirito Santo to pursue punitive damages of as much as $510 million. The same jury will decide just how money Espirito Santo gets in the second phase of the trial, which starts next week. It took the jury three hours to reach a verdict, after a trial of more than two months.

Chicago-based BDO Seidman has vowed to appeal. In court papers filed last fall, it said a jury verdict for just the $170 million in losses claimed by Espirito Santo could lead to job losses for thousands of its accountants, auditors and staff.

Steven Thomas, a Los Angeles lawyer who represents Espirito Santo, said he was pleased with the verdict…Stanley Foodman, a Miami forensic accountant not involved in the case, said BDO Seidman wasn’t exaggerating when it claimed a huge award could have major implications. ”The future of the firm is essentially in the hands of the jury,” Foodman said.”

5 replies
  1. Anonymous
    Anonymous says:

    The BDO office in Miami was a lawsuit waiting to happen. How many other failed audits were the lead partners on the Bankest involved in? Did Bankest go shopping for corrupt auditors?

    Inquiring minds want to know.

  2. Francine McKenna
    Francine McKenna says:

    Interesting idea, Mr/Ms. Anonymous. Do corrupt management teams look for corrupt auditors or partners within the auditors? Are they not so much opinion shopping as looking for auditors they can “work with?” Is it getting harder to find these types in the audit firms or has nothing really changed? Who has the leverage – the Watchers or the Watched?

  3. Anonymous
    Anonymous says:

    It’s not just an idea.

    The lead partner on the Bankest engagement has an interesting history. I’m not sure at all that it works in BDO’s favor, though.

    In the case of Bankest, they weren’t opinion shopping. They were probably looking for someone who would ignore glaring red flags for the right price.

    Banco Espirito also has a somewhat odd history. Didn’t BDO attorneys argue that it was laundering money for Pinochet?

    And someone should really look into why Bankest was funneling so much money to Stratesec, a now bankrupt firm that at one time was providing security to the WTC.

    Perhaps some enterprising WSJ reporter can report about that.

  4. The Ethics Renegade of Chicago
    The Ethics Renegade of Chicago says:

    Do you think that the alleged BDO “shopping scandal” may spur the sort of management by objective that shifts other parts of the firm to start generating more cash for their operations to offset the liability issues?

    Adding, could the influx of newer more aggressive marketing bring the same sort of rebound that occurred within the other “Big 4″s that were hit with lawsuits?

    If I remember correctly, KPMG was hit for gender discrimination? and then a couple of years later for issues surrounding Morgan Stanley? They seemed to ramp up revenue in other areas to offset and kept going?

    I think PwC had some issues as did the other Big 4 around Enron-type scenarios. Suffice it to say then, if a firm is struck by a shopping scandal – where is the outrage? Where is the erosion of client-base? The market obviously is not elastic and appears to be non-responsive? Or is it all just a function of firm compartmentalization and the concerted effort by a firm under potential scrutiny to market and rebrand or blur the negative message?

    Who was it that offered “all media events generate attention, and therefore – who cares if it good or bad? People just remember the name?” Oh, yeah that was me that said that to a client a few years ago after they commented on an issue with a competitor that is now their internal auditor.

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  1. […] June 15, following a two-month trial, a Florida jury found that the accounting firm had committed gross negligence. Under Florida law, Banco Espirito Santo was able to pursue punitive damages of as much as $510 […]

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