Banco Espirito Santo v. BDO Seidman
Defendant:
BDO Seidman, the 7th largest accounting firm in the United States with US$ 589 million in revenues in fiscal year 2007. BDO Seidman employees 2,800 people in the United States.
Plaintiffs:
Banco Espirito Santo, the 3rd largest bank in Portugal, with € 2,591 in revenues in 2006.
Procedural History:
11th Judicial Circuit Court of Florida (Miami-Dade County)
Case went to trial and on August 14th of 2007 jury reached a verdict.
Ruling:
Banco Espirito Santo was awarded $ 170 million in compensatory damages and $ 351.7 million in punitive damages as a result of gross negligence in the audits of ES Bankest by BDO from 1998 through 2002.
Facts:
Banco Espirito Santo loaned $140 million to Bankest and offered the company a $30 million line of credit. Bankest was in the business of “factoring”. It bought accounts receivables at discount and collected the debt. Banco Espirito Santo had four of its own executives in the board of directors of Bankest.
BDO was the auditor of Bankest. It attested the financial statements of Bankest and did not uncover the fraud. Bankest claimed accounts of $225 million but only $5 million represented legitimate income.
BDO was also a “strategic partner” of Stratasys, a Bankest affiliated that was used to carry out the fraud. Dominick Parlapiano the CEO of Stratasys was also the CFO of Bankest. Stratasys claimed to owe Bankest more than $30 million in receivables, even though it was a small company. Sandon Lenner, the partner in charge of the relationship with Stratasys, was also the head of the audit of Bankest. The conflict of interests may have led BDO to intentionally overlook the financial statements of Bankest.
Comments:
One legal case can destroy an accounting firm. BDO claims that it cannot pay punitive damages and that it could impair significantly the firm. It is also mentioned that the partnership structure doesn't leave the company with enough cash reserves for large legal settlements. The firm distributes most of its profits to its partners every year.
If the partnership structure leaves the future of accounting firms vulnerable to the results of a single lawsuit then changes in the ownership rules of accounting firms should be revisited. Arthur Andersen is gone. BDO seems in deep trouble, and most if not all of the major accounting firms face substantial lawsuits. As it is, it seems that one bad, “grossly negligent” audit is all that it takes to the collapse of a major accounting firm.