Hefty court order threatens BDO's US firm

A Miami jury has ordered BDO Seidman to pay $351 in punitive damages for negligence in failing to detect massive fraud in audits of financial services company, ES Bankest.

The amount brings the firm's potential liability to about $521m.

According to the firm's CEO, Jack Weisbaum, the damages award is set to pose a serious threat to the number five accounting firm's operations.

The amount is to be added to an earlier $170m compensation award to Banco Espirito Santo, which backed the financial services firm.

BDO warned in court papers that the award could trigger severe losses and massive staff redundancies to the firm's 2800 employees at 34 offices nationwide.

During the hearing, the BDO's attorney, Arturo Alvarez, laid the blame for the accounting errors on 'thieves' at Bankest, who defrauded the bank. He said BDO did not intentionally bungle the audits.

'We were victims too... we never knew [the fraud] was happening,' Alvarez told the court.

When asked if the firm's financial operations would stay the same if it had to pay the punitive damages, Weisbaum answered: 'Probably not.'

However, the bank's legal counsel suggested that the firm would be able to handle the payments if its 250 highly paid partners took salary cuts. It emerged in court that the partners received an average of $500 000 a year.

The bank said it relied on audits from BDO Seidman, which certified audits for ES Bankest accounts totalling some $225m, of which only $5m represented legitimate income.

Further reading:

Accounting Firm Must Pay Millions

Jury Awards Rise Against BDO Seidman