Author Topic: Hey LN, whats your opinion?  (Read 293 times)

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Offline Tom!

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Hey LN, whats your opinion?
« on: August 21, 2007, 12:53:25 AM »
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  • I wasnt paying attention back when Arthur Anderson went out of business but everyone says it had a definite impact on the industry.  Whats your take on another major accounting firm possibly going away?

    Tuesday, August 14, 2007
    BDO Seidman Ordered to Pay $521 Million Fine

    We have a story about one of the Big Six, and it appears that the risks of doing business as Big Four auditors are not confined to them alone.

    BDO Seidman has been ordered to pay $170 million in compensation and $351 million punitive damages. The charges: being negligent to show fraud in Bankest, a financial services company owned by a Portuguese bank, Banco Espirito Santo. A six member jury decided that BDO was guilty in one hour, having found it grossly negligent in June.

    Banco Espirito Santo claimed it partnered with Bankest Capital to form E.S. Bankest in late 1990s relying on (BDO Seidman's) faulty audits that Bankest Capital's income had nearly tripled from 1995 to 1996. The bank also relied on later audits from BDO Seidman, which certified audits for E.S. Bankest accounts totaling some $225 million, of which only $5 million represented legitimate income.

    The bank is understandably happy with this verdict, but BDO Seidman will appeal it vigorously, by posting a $50 million bail. As expected, the firm will argue that senior management at Banco Espirito Santo was aware of this fraud and was also complicit.

    And if it happens, the $521 million fine could have serious consequences on the firm, it could lead to large layoffs and it could lose its position as the number 5 accounting firm in the United States. According to the Wall Street Journal, this "casts a shadow over its future financial viability". Also the WSJ says, "Testimony and evidence presented showed that BDO had profit distributable to partners of more than $170 million for its 2006 fiscal year, which ends in June, and a net worth of about $40.5 million. BDO Chief Executive Jack Weisbaum testified that the firm wouldn't be able to pay punitive damages."

    Let' s do some math here, $170 distributable earnings among 250 partners works out to about $700,000 payout per partner. The $521 million damage is equal to three years of current year earnings; and even exceeds the $445 million that KPMG agreed to pay the US government to avoid criminal indictment in its massive tax fraud case.

    In a large accounting firm, such a number could be spread over a large number of partners so that the individual impact on each partner is reasonable and can be handled if necessary with lower annual earnings spread over many years.

    BDO Seidman USA is allied with BDO International, which coordinates companies with about 30,000 partners and staff and reported total fee income of $3.91 billion in 2006. In the US, BDO Seidman had revenues of $589 million in 2006, 3,800 employees,. 250 partners and 34 offices.

    But can BDO Seidman effectively handle such a large amount of payouts, without losing its current structure. This is serious money for a medium sized firm. If the award does go through, we could see the firm essentially unable to handle this financial distress. We have blogged earlier that the finance and investing world could not effectively handle the disappearance of a Big Four firm, but what about such a possibility for a Big Six firm. The debate on caps on auditor liability will again take the forefront on such an eventuality.

    We will have to wait on the resolution of BDO's appeal to see how this lands.