BDO case may set precedent for umbrella bodies' liability

A watershed appeal involving
BDO International
could lead to international networks being held liable for claims involving
their US member firms.

The case now hinges on a ‘right to control’ issue which, if proved, would be
the first instance of a network facing punishment for a member firm’s problems.

BDO Seidman is facing a $521m (£264m) bill in the US, following a claim from
Banco Espirito Santo that it
was negligent in its audits of factoring company Bankest.

A court found Seidman to be ‘grossly negligent’, a verdict it is appealing
against. But in a separate action, Banco ES has won the right to have its claim
heard before a jury that BDO International should be jointly liable.

‘There’s a likelihood [if the appeal is won] that in future US litigations
the Big Four International networks are going to be held liable as well,’ said
Steven Thomas, lead lawyer for creditors Banco ES.

Banco ES claimed BDO International was ‘vicariously liable as principal for
the acts and omissions of BDO Seidman’ as Bankest’s auditor.

‘This case looks at the way these big accountancy firms set themselves up and
advertise to the world that they are one big firm, but distance themselves when
problems occur. It’s going to be the same whether you’re talking about KPMG, PwC
or any of the big firms,’ said Thomas.

Auditors from BDO Seidman were accused of ‘accounting malpractice’ and being
‘grossly negligent’ in audits between 1998 and 2002. Banco ES claims BDO
International had ‘the right to control’ BDO Seidman. ‘BDO International
controls BDO Seidman right down to how they type their letters,’ said Thomas.

BDO International claims control relationships were not so strict, with only
ten people working at the umbrella body, and described the control claims are
‘puffery’.

Rhett Traband, representing BDO International at the appeals court argued
that the network’s audit manual, which all BDO firms follow, does not apply to
all audits.

‘The only agreement between the parties specifies that [the rules] only apply
in limited circumstances to trans-national audits rules and inward referred
work, neither of which were the Bankest audit.’

Traband added: ‘[BDO International] cannot come in during an audit and say to
them “do it this way”.’