Page 81 - The Handbook - Legal and Accounting Networks 81
P. 81
Law and Accounting Networks and Associations
— “respondeat superior” — meaning that the responsibility of the superior for the acts of its subordinate or, in
a broader sense, the responsibility of any third party that had the “right, ability or duty to control” the activities
of a violator. It can be distinguished from contributory liability, another form of secondary liability, which is
rooted in the tort theory of enterprise liability.345
The best-known cases are In re Parmalat Securities Litigation346 and cases involving the collapse of Enron. A
recent case raised the issue again.347 The defendant is sued for its contribution to the damages as a result of
alleged involvement in the transaction. It can arise in many different ways. Regarding a network, there have
been two such cases: In re Parmalat Securities Litigation and Banco Espirito Santo v. BDO Seidman
International.348
Vicarious liability issues are related directly to the operations and marketing of the network. As to operations,
the issues relate to control of the members. Marketing and public relations issues relate to the public’s
perception and reliance on that perception that members of a network are in fact the same legal entity. In the
simplest terms, if the network controls the members by imposing specific rules or becomes involved in decision
making at member firms, a case can be made for vicarious liability.
In re Parmalat Securities Litigation: In the early 1990s, Parmalat, an Italian dairy conglomerate, pursued an
aggressive growth strategy financed largely by debt. Its expansion into South America turned out to be reckless,
and it lost millions of dollars. To cover the losses, debt, and diversion of funds by the owners, cash was
necessary. This required that the company be seen as a good investment. Grant Thornton–Italy devised a
system involving misleading transactions that created the appearance of financial health.
In 1999, Parmalat was legally obliged to take on a new auditor. They hired Deloitte & Touche–Italy (Deloitte-
Italy), which then hired other firms in other countries. A subsidiary in the Caribbean that handled phone
transactions continued to be audited by Grant Thornton-Italy (GT-Italy). Concerned that new auditors would
discover and disclose the fraud, they moved the allegedly fictitious financing transactions to a new company
incorporated in the Caribbean that would continue to be audited by GT-Italy. Deloitte offices in a dozen
countries audited Parmalat and its subsidiaries and affiliates as part of this worldwide engagement. Deloitte
either uncovered or ignored the fraud and certified the financial statement.
In December of 2003, the scheme became unsustainable, and the Parmalat collapse was rapid. The company
announced that a Bank of America account that supposedly contained $4.9 billion did not exist. Parmalat filed
for bankruptcy in Italy. The Italian government indicted Parmalat officials and some executive employees and
partners of Grant Thornton–Italy. Vicarious liability claims were filed against Deloitte Touche Tohmatsu
(DTT), the network Swiss Verein,349 Deloitte U.S., Grant Thornton International (GT International), and Grant
Thornton U.S.
GT International was alleged to have the power to control GT-Italy. It could remove partners of GT-Italy, expel
GT-Italy from the network, own the intellectual property, and make admission and policy decisions. The court
refused to dismiss because it found that there could be an agency agreement. It would be for a jury to decide.
345 Vicarious Liability, WIKIPEDIA, en.wikipedia.org/wiki/Vicarious_liability.
346 In re Parmalet Securities Legislation, Case 1:04-md-01653-LAK-HBP Document 1669, Filed 01/27/2009.
347 In March of 2008 a Florida appeals court overturned a claim against its U.S. member that involved fraud uncovered in a Portuguese bank in 2002.
The bank had been ordered to pay $520 million in damages. BDO and BDO International were sued. BDO International was dismissed as not being
involved in the audit. The appeals court stated that this should have been decided by the jury. Smith, supra note 341 at 26.
348 SEC Charges PwC Affiliates with Aiding Satyam Accounting Fraud, ACCOUNTING TODAY (April 12, 2011) at 22. The network members were treated
as independent with fines and other penalties being imposed only on PwC India; see also Banco Espirito Int’l v. BDO Seidman LLP, 979 So. 2d 1030,
1031 (Fla. Cir. Ct. 2008).
349 See supra Chapter 1, What is a Professional Services Network? DTT is the network to which all of the Deloitte Touche independent members belong.
69
— “respondeat superior” — meaning that the responsibility of the superior for the acts of its subordinate or, in
a broader sense, the responsibility of any third party that had the “right, ability or duty to control” the activities
of a violator. It can be distinguished from contributory liability, another form of secondary liability, which is
rooted in the tort theory of enterprise liability.345
The best-known cases are In re Parmalat Securities Litigation346 and cases involving the collapse of Enron. A
recent case raised the issue again.347 The defendant is sued for its contribution to the damages as a result of
alleged involvement in the transaction. It can arise in many different ways. Regarding a network, there have
been two such cases: In re Parmalat Securities Litigation and Banco Espirito Santo v. BDO Seidman
International.348
Vicarious liability issues are related directly to the operations and marketing of the network. As to operations,
the issues relate to control of the members. Marketing and public relations issues relate to the public’s
perception and reliance on that perception that members of a network are in fact the same legal entity. In the
simplest terms, if the network controls the members by imposing specific rules or becomes involved in decision
making at member firms, a case can be made for vicarious liability.
In re Parmalat Securities Litigation: In the early 1990s, Parmalat, an Italian dairy conglomerate, pursued an
aggressive growth strategy financed largely by debt. Its expansion into South America turned out to be reckless,
and it lost millions of dollars. To cover the losses, debt, and diversion of funds by the owners, cash was
necessary. This required that the company be seen as a good investment. Grant Thornton–Italy devised a
system involving misleading transactions that created the appearance of financial health.
In 1999, Parmalat was legally obliged to take on a new auditor. They hired Deloitte & Touche–Italy (Deloitte-
Italy), which then hired other firms in other countries. A subsidiary in the Caribbean that handled phone
transactions continued to be audited by Grant Thornton-Italy (GT-Italy). Concerned that new auditors would
discover and disclose the fraud, they moved the allegedly fictitious financing transactions to a new company
incorporated in the Caribbean that would continue to be audited by GT-Italy. Deloitte offices in a dozen
countries audited Parmalat and its subsidiaries and affiliates as part of this worldwide engagement. Deloitte
either uncovered or ignored the fraud and certified the financial statement.
In December of 2003, the scheme became unsustainable, and the Parmalat collapse was rapid. The company
announced that a Bank of America account that supposedly contained $4.9 billion did not exist. Parmalat filed
for bankruptcy in Italy. The Italian government indicted Parmalat officials and some executive employees and
partners of Grant Thornton–Italy. Vicarious liability claims were filed against Deloitte Touche Tohmatsu
(DTT), the network Swiss Verein,349 Deloitte U.S., Grant Thornton International (GT International), and Grant
Thornton U.S.
GT International was alleged to have the power to control GT-Italy. It could remove partners of GT-Italy, expel
GT-Italy from the network, own the intellectual property, and make admission and policy decisions. The court
refused to dismiss because it found that there could be an agency agreement. It would be for a jury to decide.
345 Vicarious Liability, WIKIPEDIA, en.wikipedia.org/wiki/Vicarious_liability.
346 In re Parmalet Securities Legislation, Case 1:04-md-01653-LAK-HBP Document 1669, Filed 01/27/2009.
347 In March of 2008 a Florida appeals court overturned a claim against its U.S. member that involved fraud uncovered in a Portuguese bank in 2002.
The bank had been ordered to pay $520 million in damages. BDO and BDO International were sued. BDO International was dismissed as not being
involved in the audit. The appeals court stated that this should have been decided by the jury. Smith, supra note 341 at 26.
348 SEC Charges PwC Affiliates with Aiding Satyam Accounting Fraud, ACCOUNTING TODAY (April 12, 2011) at 22. The network members were treated
as independent with fines and other penalties being imposed only on PwC India; see also Banco Espirito Int’l v. BDO Seidman LLP, 979 So. 2d 1030,
1031 (Fla. Cir. Ct. 2008).
349 See supra Chapter 1, What is a Professional Services Network? DTT is the network to which all of the Deloitte Touche independent members belong.
69
