Page 82 - The Handbook - Legal and Accounting Networks 81
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Law and Accounting Networks and Associations
Deloitte Touche Tohmatsu was alleged to have intervened in audit personnel decisions of Deloitte-Brazil.
Deloitte-Italy allegedly sought input from DTT.350 The court refused to dismiss the claim that Deloitte-U.S.
could be acting as the agent of Deloitte-Italy. The court held that there was no basis for the control allegation
and dismissed that part of the complaint. The cases were subsequently settled, and the plaintiffs received $15
million from Deloitte and Grant Thornton.
Banco Espirito Santo v. BDO Seidman International was another case dealing with alleged vicarious liability.
In 2007, BDO Seidman (Seidman) was found negligent in a case brought against it by Banco Espirito Santo.
However, the trial court found that the plaintiff failed to adduce sufficient evidence to allow the jury to decide
whether BDO International (International) was liable on an actual-agency basis for the actions of Seidman and,
therefore, responsible for the alleged negligence of Seidman. Seidman was sued with respect to audit. It had
not discovered the multi-million dollar audit fraud. A vicarious liability claim was asserted against
International. The theory was that International was the agent of Seidman.
The trial judge entered judgment for International on the grounds that plaintiffs had failed to present sufficient
evidence of actual agency. The question was whether the lack of discovery of fraud occurred in the context of
the member firm agreement. The case was remanded for a jury to decide on appeal.
The following questions arose during the trial: Did International acknowledge BDO Seidman would act for it?
Did Seidman accept agency of International? Did International have the power to control Seidman? The
analysis showed that in International’s documents it stated that one of its purposes was to “manage” and
“control” member firms.351 For example, International could require personnel from member firms to work on
a particular matter. International controlled the intellectual property, audit manuals, and procedures, and had
the right to review all matters.
The fundamental question was whether there was in fact an agency relationship. If there was such a
relationship, the issue was whether the negligence occurred within the scope of the agency. Plaintiff argued
that Seidman was following the manual, and that International controlled the branding and could terminate
Seidman. The judge only permitted the theory of actual agency to be asserted at trial. The jury decided there
was no actual agency.
The matter is not over. Even though International was dismissed, it still must prove why they should not be
liable.352 While the Seidman verdict was dismissed on the evidence that the judge permitted in the trial, the
issues of the negligence of Seidman353 and damages remain open.
In summary, the branding of accounting firms as integrated companies is now over.354 New rules have been
established by case law and regulations. Accounting groups must address whether they are going to be
350 Philip Smith, Auditors Settle with Parmalat Investors, ACCOUNTANCY AGE (Nov. 20, 2009),
www.accountancyage.com/print_artice/aa/new/1785205/auditors-settle-parmalate.asp.
351 David Jetuah, BDO Case May Set Precedent for Umbrella Bodies’ Liabilities, ACCOUNTANCY AGE (May 2008). In the pleadings, “Banco ES claims
that BDO International had ‘the right to control’ over BDO Seidman. ‘BDO International controls BDO Seidman right down to how they type their
letters.’ BDO International claims control relations were not so strict with only ten people working at the umbrella body and described the control claims
are ‘puffery.’ BDO cannot come in during an audit and say to them ‘do it this way.’”
www.accountancyage.com/print_artice/aa/news/175912/bdo-set-precedent-umbrella.asp.
351 David Jetuah, BDO International Dismissed but Must Prove Why They Should Not be Culpable, ACCOUNTANCY AGE (March 2008),
www.accountancyage.com/print_artice/aa/news/175912/bdo-international-dismissed.asp.
352 Id.
353 Philip Smith, International Networks Survey: the Big Chill, ACCOUNTANCY AGE (May 27, 2010),
www.accountancyage.com/aa/feature/1809718/international-networks-survey-chill.
354 Philip Smith, Networks Survey: Global Risk, ACCOUNTANCY AGE (November 2008),
www.accountancyage.com/print_artice/aa/feature/1748284/networks-survey-global-risk: “Crucially, this is why many of the organizations are
bending over backward to stress they are not networks, as defined by the EU and other organizations such as IFAC. To claim to be one seamless firm
without national boundaries might be very appealing in marketing terms, it is a complete nightmare as far as the lawyers are concerned.”
70
Deloitte Touche Tohmatsu was alleged to have intervened in audit personnel decisions of Deloitte-Brazil.
Deloitte-Italy allegedly sought input from DTT.350 The court refused to dismiss the claim that Deloitte-U.S.
could be acting as the agent of Deloitte-Italy. The court held that there was no basis for the control allegation
and dismissed that part of the complaint. The cases were subsequently settled, and the plaintiffs received $15
million from Deloitte and Grant Thornton.
Banco Espirito Santo v. BDO Seidman International was another case dealing with alleged vicarious liability.
In 2007, BDO Seidman (Seidman) was found negligent in a case brought against it by Banco Espirito Santo.
However, the trial court found that the plaintiff failed to adduce sufficient evidence to allow the jury to decide
whether BDO International (International) was liable on an actual-agency basis for the actions of Seidman and,
therefore, responsible for the alleged negligence of Seidman. Seidman was sued with respect to audit. It had
not discovered the multi-million dollar audit fraud. A vicarious liability claim was asserted against
International. The theory was that International was the agent of Seidman.
The trial judge entered judgment for International on the grounds that plaintiffs had failed to present sufficient
evidence of actual agency. The question was whether the lack of discovery of fraud occurred in the context of
the member firm agreement. The case was remanded for a jury to decide on appeal.
The following questions arose during the trial: Did International acknowledge BDO Seidman would act for it?
Did Seidman accept agency of International? Did International have the power to control Seidman? The
analysis showed that in International’s documents it stated that one of its purposes was to “manage” and
“control” member firms.351 For example, International could require personnel from member firms to work on
a particular matter. International controlled the intellectual property, audit manuals, and procedures, and had
the right to review all matters.
The fundamental question was whether there was in fact an agency relationship. If there was such a
relationship, the issue was whether the negligence occurred within the scope of the agency. Plaintiff argued
that Seidman was following the manual, and that International controlled the branding and could terminate
Seidman. The judge only permitted the theory of actual agency to be asserted at trial. The jury decided there
was no actual agency.
The matter is not over. Even though International was dismissed, it still must prove why they should not be
liable.352 While the Seidman verdict was dismissed on the evidence that the judge permitted in the trial, the
issues of the negligence of Seidman353 and damages remain open.
In summary, the branding of accounting firms as integrated companies is now over.354 New rules have been
established by case law and regulations. Accounting groups must address whether they are going to be
350 Philip Smith, Auditors Settle with Parmalat Investors, ACCOUNTANCY AGE (Nov. 20, 2009),
www.accountancyage.com/print_artice/aa/new/1785205/auditors-settle-parmalate.asp.
351 David Jetuah, BDO Case May Set Precedent for Umbrella Bodies’ Liabilities, ACCOUNTANCY AGE (May 2008). In the pleadings, “Banco ES claims
that BDO International had ‘the right to control’ over BDO Seidman. ‘BDO International controls BDO Seidman right down to how they type their
letters.’ BDO International claims control relations were not so strict with only ten people working at the umbrella body and described the control claims
are ‘puffery.’ BDO cannot come in during an audit and say to them ‘do it this way.’”
www.accountancyage.com/print_artice/aa/news/175912/bdo-set-precedent-umbrella.asp.
351 David Jetuah, BDO International Dismissed but Must Prove Why They Should Not be Culpable, ACCOUNTANCY AGE (March 2008),
www.accountancyage.com/print_artice/aa/news/175912/bdo-international-dismissed.asp.
352 Id.
353 Philip Smith, International Networks Survey: the Big Chill, ACCOUNTANCY AGE (May 27, 2010),
www.accountancyage.com/aa/feature/1809718/international-networks-survey-chill.
354 Philip Smith, Networks Survey: Global Risk, ACCOUNTANCY AGE (November 2008),
www.accountancyage.com/print_artice/aa/feature/1748284/networks-survey-global-risk: “Crucially, this is why many of the organizations are
bending over backward to stress they are not networks, as defined by the EU and other organizations such as IFAC. To claim to be one seamless firm
without national boundaries might be very appealing in marketing terms, it is a complete nightmare as far as the lawyers are concerned.”
70
