I Chose BDO
In what has to be the bonehead move of the year, several public companies selected BDO Seidman (The US firm) as their new auditor this year, even though it has been under a cloud regarding the Banco Espirito Santo case since it was filed in 2004.
In March, a mistrial was declared because plaintiff attorneys, while questioning a witness, referred to the suicide of a BDO executive in 2003. The death reportedly took place shortly after a $220 million fraud was discovered at a BDO audit client, financial-services firm E.S. Bankest.
On 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 million. “A judgment of that size certainly would have a severe impact on any firm,” a BDO spokesman told CFO.com at the time.
On Tuesday of this week, the jury awarded Banco Espirito Santo the full treble damages, bringing the potential penalty for BDO to US $521.7 million dollars.
So what in the world would possess the following companies to switch to BDO, especially after June 15?
In particular why would a company switch from a Big 4 to BDO during this period? Well, in the case of Vitesse, Saflink and Learning Tree, it is for the worst reasons… They were subject to restatements, delistings, and other unpleasant revelations delivered by their former big firm auditors and so BDO, the next-tier, scooped up some troublesome, high risk clients.
Is that what we want? The flight from the big firm that’s afraid of the liability from risky clients to the next tier firm that can’t handle the heat?
SIGMATEL INC from:PricewaterhouseCoopers, LLP to BDO when:07/27/07
SGS INTERNATIONAL, INC. from:PricewaterhouseCoopers LLP to BDO when:07/25/07
ADVANCED PHOTONIX INC from:Farber Hass Hurley & McEwen, LLP to BDO when:07/20/07
BUREAU OF NATIONAL AFFAIRS INC from:KPMG LLP to BDO when: 07/11/07
NEOPHARM INC from:KPMG LLP to BDO when:07/06/07
FERMAVIR PHARMACEUTICALS, INC. from:J.H. Cohn LLP to BDO when:07/02/07
SAFLINK CORP from:KPMG LLP to BDO when:06/18/07
CARDIODYNAMICS INTERNATIONAL CORP from:Mayer Hoffman McCann P.C
to BDO when: 06/14/07
VITESSE SEMICONDUCTOR CORP from:KPMG LLP to BDO when:06/06/07
LEARNING TREE INTERNATIONAL INC from:Ernst & Young LLP to BDO when:05/31/07
WESTAFF INC from:Deloitte & Touche, LLP to BDO when:05/24/07
XENOMICS INC from:Lazar Levine & Felix LLP to BDO when:04/11/07
SPARTAN MOTORS INC from:Ernst & Young LLP to BDO when:03/29/07
INSURE.COM, INC from:Ernst & Young LLP to BDO when:03/12/07
XCORPOREAL, INC. from:Amisano Hanson, Chartered Accountants
to BDO when:02/14/07
It wasn’t so long ago that the head of BDO Stoy Hayward, BDO Seidman’s affiliate firm in the UK told the FT in a Letter to the Editor:
“Auditors must be held to account for their actions, but destroying a whole audit network because of shortcomings of others is not the way to ensure confidence in the capital markets in the decades ahead.”
Positively scathing! In line with my comments from the other day on another post, I don’t think the entire firm should be tarred by the inactions of a few people.
So what should have those companies done instead of switching to a mid-tier firm? Switched to a different Big Four firm?
If a company has to switch, they should choose a firm that is not only capable of auditing them, but is not as risky or more than they are. Another next-tier firm, a Big 4? You have a point. They all have issues. But BDO at that point was so risky, they should not have taken on new clients, especially ones that needed so much care and feeding. This is where the regulators are remiss. They are allowing auditor musical chairs with no concern for the cost or potential disruption of constant changes to either the clients or the trusting employees of the audit firm.
With all due respect, I think the problem is different. When BDO got in trouble with tax shelters, they stonewalled. How many partners just decided that eventually BDO would go under and started doing no audit audits to maximize current revenue. They have been underbidding even local firms — how can they be doing this??
Another interesting detail from the reports about the trial. The attorney for the plaintiff apparently used frequent references to both the FBI and the FDIC in its closing arguments for the punitive damages stage of the trial. BDO continuously tried to object, but was overruled by the judge.
What do you suppose the content of those references was? And why has this trial received so little attention?
Unfortunately, an ongoing dispute between a non-Big 4 firm and a Portuguese bank was not seen by US media to have any “relevance” to the wider investor and business public until the crap hit the fan. Then the WSJ, FT, NYT and others were all over it. Actually, I was disappointed in FT. It took them quite a while to pick up on the story and they are usually ahead of the the US papers on all things accountancy. BDO and the other next tier firms are also more active and outspoken in the UK than in the US. As has been suggested, there is much more to this story, I’m convinced. With continuing litigation, you may see more scrutiny now. BDO is very confident they’ll prevail on appeal. I’m not so sure. Tipping point, anyone?