Fla. jury to decide if BDO International liable for $521 million accounting judgment

Fla. jury to decide if BDO International liable

MIAMI — Trial opened Tuesday in a lawsuit brought by a Portuguese bank charging that accounting network BDO International BV was negligent by failing to guarantee the quality of audits performed by its U.S. member firm, BDO Seidman LLP.

Banco Espirito Santo in 2007 won a $521 million verdict against BDO Seidman for not detecting massive fraud that resulted in millions lost at a now-defunct Miami financial services company backed by the bank. The bank insisted blame also should extend to the international network, run by BDO International from Brussels, Belgium.

The key issue for a six-member jury is whether the international entity managed and controlled its 110 member firms, which include BDO Seidman in the U.S. and employ some 44,000 people worldwide. BDO International is the world’s fifth-largest accounting firm network, with combined fee income of $5.1 billion in 2008.

Espirito Santo attorney Steven Thomas said in an opening statement that BDO International failed to keep its own promises of quality control when it came to BDO Seidman.

“They have the right to tell BDO Seidman how to do their job. They have the right to tell them how they look. They have the right to fire them,” Thomas said. “Because BDO International did not live up to their public responsibility, BDO Seidman did grossly negligent audits.”

BDO attorneys, however, say the international entity does not control its member firms but performs mainly administrative functions and has only a handful of employees. They contend that BDO Seidman and all the other member firms act independently and do not answer to the international unit in Belgium.

“BDO International BV is not the boss,” BDO attorney Mark Raymond said in his opening statement. “It doesn’t direct the work and it gets no profits.”

The trial, expected to last two or three weeks, stems from a Florida appeals court ruling last year that overturned a judge’s decision in the first trial that BDO International did not manage or control BDO Seidman. There was also an earlier mistrial in the long-running corporate dispute.

The case revolves around a former Miami company called E.S. Bankest. That firm engaged in a business called “factoring,” in which companies’ accounts receivable are purchased for less than they are worth and profits come when collections bring in a higher amount.

At least seven people, including E.S. Bankest directors Eduardo and Hector Orlansky, have been convicted of federal criminal charges related to the fraud and sentenced to prison. Prosecutors said E.S. Banest inflated the value of the accounts it bought and presenting fake audited financial statements.

BDO Seidman was accused by Espirito Santo of failing to detect fraud in numerous audits of E.S. Bankest, resulting in losses of more than $170 million to the bank. The $522 million verdict from the earlier trial includes that amount plus punitive damages.

Espirito Santo, founded in Portugal in 1920, expanded to Portuguese-speaking Brazil and bought a Miami-based bank in the early 1980s.


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