Many sectors, such as finance and technology, have global firms that have expanded business overseas and increased operations beyond their corporate U.S. headquarters. Even law firms have opened foreign offices to better serve their clients in other countries and increase their profits. The accounting industry need not be included in this group. Well, maybe the Big Four accounting firms — Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers — can be included in the global enterprise group. However, while many accounting firms may market themselves as single entities with worldwide organizations, they present a different face when they are sued.

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	The entire question of accounting firms, affiliates, and the relationship between the two arose from a case brought by a Portuguese bank. Banco Espirito Santo International lent $170 million to a Florida-based company. The Florida company was audited by BDO Seidman, and the reports showed $225 million in receivables.

Accounting Firms Have a Few Tricks Up Their Sleeves

When an accounting firm is sued, firms with like names are quick to deny any association with the guilty party. In all honesty, wouldn’t we all do the same? The main reason for this cut-and-run tactic is liability, or rather, one firm’s desire to eliminate liability for another firm’s mistake. The partners of a U.S.-based firm have no inclination to share liability with a British affiliate.

Indeed, a recent case in Florida highlights this very practice. A judge ruled that BDO International had no responsibility for the bad audit performed by one of its affiliates, BDO Seidman. As a result, BDO Seidman had to pay $521 million in damages all by itself, and BDO International remained unscathed.

However, the New York Times reports that this may soon change.

The Case That Broke the Bank, or in This Case the Accounting Firm

The entire question of accounting firms, affiliates, and the relationship between the two arose from a case brought by a Portuguese bank. Banco Espirito Santo International lent $170 million to a Florida-based company. The Florida company was audited by BDO Seidman, and the reports showed $225 million in receivables.

In actuality, the company only had $5 million in receivables, and it was soon discovered fraud was going on the entire time. Banco Espirito Santo International sued BDO International and BDO Seidman, claiming the accounting firm should have caught the fraud.

Now the question is ''Who’s liable?''

Coordinating Entities May Be Forced to Exercise Management and Control over Affiliates

An appellate court in this same case is considering an argument that holds BDO International responsible for BDO Seidman’s operations, as BDO Seidman is an agent of the international firm. If the original ruling is overturned, affiliates may be held to the same accounting rules as the international firms, regardless of how legally separated they are. Large firms and their entities market themselves as unified organizations, and the appeals court may hold them to that standard.

If this scenario becomes reality, coordinating firms will need much more capital to control their affiliates — capital that is simply not there.

What Happens Next?

It remains to be seen what will happen to the chess game accounting firms have been playing these past decades. Will BDO International be found liable for BDO Seidman’s error? It may very well play out that accounting firms will have to be organized in the same way their international corporation clients are organized.

On the net:

The New York Times

BDO International and BDO Seidman

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