Page 82 - Professional Services Networks
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The Handbook: Law Firm Networks
European Group of International Accounting Networks and Associations (Egian)368 are members of the
Forum of Firms, the members have very different interests from the Big 4. Egian members are seeking audit
work that is dominated by the Big 4.
Accounting Firms – Vicarious Liability
Members of a network can in theory be vicariously liable for the action of other members of the network.
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency
— “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.369
The best-known cases are In re Parmalat Securities Litigation370 and cases involving the collapse of Enron.
A recent case raised the issue again.371 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.372
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
368 EUROPEAN GROUP OF INTERNATIONAL ACCOUNTING NETWORKS AND ASSOCIATIONS, www.egian.eu/members_list.htm (last visited Feb. 5, 2016).
369 Vicarious Liability, WIKIPEDIA, en.wikipedia.org/wiki/Vicarious_liability (last visited Feb. 5, 2016).
370 In re Parmalet Securities Legislation, Case 1:04-md-01653-LAK-HBP Document 1669, Filed 01/27/2009.
371 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.
372 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).
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European Group of International Accounting Networks and Associations (Egian)368 are members of the
Forum of Firms, the members have very different interests from the Big 4. Egian members are seeking audit
work that is dominated by the Big 4.
Accounting Firms – Vicarious Liability
Members of a network can in theory be vicariously liable for the action of other members of the network.
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency
— “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.369
The best-known cases are In re Parmalat Securities Litigation370 and cases involving the collapse of Enron.
A recent case raised the issue again.371 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.372
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
368 EUROPEAN GROUP OF INTERNATIONAL ACCOUNTING NETWORKS AND ASSOCIATIONS, www.egian.eu/members_list.htm (last visited Feb. 5, 2016).
369 Vicarious Liability, WIKIPEDIA, en.wikipedia.org/wiki/Vicarious_liability (last visited Feb. 5, 2016).
370 In re Parmalet Securities Legislation, Case 1:04-md-01653-LAK-HBP Document 1669, Filed 01/27/2009.
371 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.
372 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).
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