Miami Jury Finds BDO International Not Guilty – Huge Implications

We recently blogged on the recent ongoing trial on BDO International vs. Banco Espirito Santo in Miami, Florida with a jury in session to decide on the issue whether BDO Seidman, the US country firm, was an agent of BDO International, and whether the global umbrella firm should hold financial responsibility for the liabilities of the US firm.
(http://bigfouralumni.blogspot.com/2009/05/bdo-seidman-vs-banco-espirito-case.html)

There were two separate charges against BDO Seidman which were upheld in another court, one for compensatory damages of $170 million and the other for punitive damages of $351 million for a total of $521 million. Earlier, Judge John Schlesinger had ruled that the BDO International would not be held responsible for the punitive damages of $351 million, leaving only the $170 million to be decided by the jury.

We just listened to the 10 minute verdict delivered by the foreman of the jury (supplied to us courtesy of http://http://www.courtroomview.com/): BDO International is not responsible for the penalties imposed on BDO Seidman and the US firm was not agent of the global umbrella organization.

And the six member jury did not take long (barely an hour) to return an unanimous verdict. To the singular question, “Was BDO Seidman was an actual agent of the BDO International BV?”, the jury simply said “No”.

A clear win for BDO firms and perhaps an ever greater precedent-setting case with far reaching implications for accounting firms and the accounting industry, and in particular global firms such as the Big4 firms which operate as country partnerships under a global management organization. Clearly a guilty verdict would have created a host of troubles for Big4 firms, as this would have set a precedent in conferring liabilities upwards from child firms into the parent organization. A not-guilty verdict is very supportive but perhaps not entirely ruling out similar verdicts in the future.

BDO Seidman has clearly escaped a difficult situation, and while BDO International’s overall financial position may not be impaired, the US firm still has to come up with hundreds of millions of dollars to fulfill earlier damages. The source of this money is not that obvious, BDO Seidman has already said it will need to cut large number of employees to locate the funds. BDO Seidman is already appealing that earlier $521 million verdict. Meanwhile, the firm seems to be operating as usual.

The other case, which is likely to follow is Satyam Computer in India, along with its auditors, PwC India and then correspondingly PwC International. Under Indian rules, local auditors can be immediately charged with criminal cases, and as it happened two PwC India partners were jailed for conspiring in the Satyam scam. There has been no suit as yet against PwC India or PwC Global (most likely in the works), but surely shareholders or other parties will sue PwC local and international firms for auditing and certifying statements when clearly there was fraud going on at Satyam. There must be an audible sigh of relief at PwC on this verdict, and if there are extraordinary financial damages imposed on the Indian firm, the damage is likely to be localized and not travel up into the global organization and deeper pockets for larger sums of moneys to plaintiffs. Obviously, a guilty verdict in the BDO case would have been devastating precedent on the PwC case but a not-guilty verdict is no guarantee that the international PwC firm is shielded watertight from severe financial damage.

Two big verdicts for the defendant’s lawyer Mark Raymond sets him up far above a dual negative punch for plaintiff’s lawyer Steven Thomas. It is not clear at this time how these two lawyers will be involved in the BDO appeals case.

We hear there is another case looming in Florida with Ernst and Young defending its auditing and consulting at the defunct Superior Bank of Chicago (with key involvement by Hyatt’s Pritzker family), which was taken over by the FDIC in 2001, and that calls into question another prickly issue for Big4 firms, conflict of interest when both consulting and auditing are provided by the same firm (eventually which led to sale of E&Y’s consulting unit to CapGemini, sale of PwC’s consulting unit to IBM and spin-off and bankruptcy of KPMG’s consulting unit – BearingPoint)

We’ll be watching both on BDO’s appeal and the E&Y case as they unfold in the future.