BDO International: “Manage and Control” Means Slam Dunk For BESBy Francine • Jun 6th, 2009 • Category: Latest, Pure Content, The Case Against The Auditors
After a week’s delay, the Banco Espirito Santo (aka ES Bankest ) vs. BDO International trial finally started in Miami on June 2. I was approached by Courtroom View Network and given access to the full trial tapes and select clips in exchange for this mention. The first day of the trial was quite a long, arduous combination of jury instructions, opening statements by both attorneys, and testimony from the BDO International Secretary Paul Van Elten. (BDO International is now known as BDO Global Coordination B.V., a recent name change.) But it all was worth the price of the ticket.
Go here for better longer clips of both opening statements and the testimony of BDO Secretary Paul Van Elten. There will be more, including hopefully some custom excerpts, as the trial progresses.
Some general impressions first.
I’ve been following Steven Thomas of Thomas Alexander & Forrester in the BDO International case and in his new initiative regarding KPMG International and New Century. He’s on a roll. And I personally believe he’s got a slam dunk case against BDO International. But watching him give his opening statements and question International Secretary Van Elten sort of burst my admiration bubble. Maybe he has to be slow, ponderous, repetitive, folksy, and borderline condescending to the jury to help them comprehend what is, to even accounting industry professionals, a very complex case.
But the proceedings made my head hurt. Even when questioning Van Elten, who is probably an otherwise intelligent international executive, I felt he was being very tedious. Maybe this approach is a result of the same frustration I have sometimes with seemingly intelligent folks who find accounting and these issues boring, too hard to follow. To me, they are pretty straightforward and critically important. My bias. Yes. But I try not to dumb-down the writing on this site, even while attempting to make it interesting, entertaining, and hopefully enticing. The facts are the facts and they can’t be made much simpler without dangerously distorting or diluting their meaning.
Well, Thomas is the professional and he will win. So I hope it’s all part of the grand strategy. But the issues are so simple and the evidence, in my mind, so compelling that I could have tried the case.
The attorney for the defense, Mark Raymond who is Managing Partner of Broad and Cassel, is even more boring and lame. His opening argument was pathetic, characterizing BDO International as a “wedding planner,” an insult to his client.
”Like a wedding planner, they coordinate, they facilitate,” Raymond said. “Does a bride give the wedding planner all of these rights to run and control everything? Of course not.”
Is there a defense that’s more embarrassing for the accounting firms than “We were duped?” Yes. It will now be called the “Wedding Planner” defense, intended to excuse senior leadership and a global network of member firms for the sins of their business partners based on turning the principal/agent relationship upside down. Raymond is stretching, but in this case he’s pulled a major muscle. I don’t think he’s going to recover.
I did like how Thomas began his opening argument. He told the jury that the case is all about relationships and that relationships come in all shapes and sizes, but they all carry responsibilities and obligations. He then, during several stops and starts, rambles, meanderings, and roundabouts eventually gets the meat of his case on the table:
BDO International has the contractual right to manage and control every aspect of their member firms conduct of the professional services typical of a public accounting firm. However, in the case of BDO Seidman, their US firm, and ES Bankest, the client who sued and won a huge gross negligence claim against them, BDO International did not exercise this right.
Thomas posits in his opening statement and then solicits testimony from Van Elten, the BDO International Secretary, to prove that BDO International has the contractual right, based on the contracts each member firm signs with BDO International when they join the network, to:
- Decide which firms are allowed into the BDO network of firms;
- Tell member firms how to look via rules about use of the name, acronyms, logo, use of style sheets for correspondence and other marketing standards;
- Tell member firms how to do their work via methodologies, software, technical manuals including audit manuals, and mandatory quality assurance inspections; and
- Enforce these contractual obligations, as a final step, by expelling a member firm if they can not or will not comply.
Later, he gets the BDO International Secretary to testify that the three main objectives of the International entity, as defined in their articles of Association at the time of the ES Bankest audits (1998-2002) were:
- To promote high standards of accountancy, audit, and financial and business advice throughout the world;
- To acquire, own, grant licenses or other rights, and authorize the use of the name BDO, logos, and styles to accounting firms of repute all over the world; and
- To participate and cooperate with other companies, partnerships, and entities which form the network as well as to manage and control the member firms.
Why do they have poor Paul Van Elten sitting in the hot seat? He’s only the custodian of the global-size binder clips. What is the ultimate strategy here? Thomas has already won a judgement with punitive damages for his client against BDO Seidman. A huge judgement. One that they said two years ago they could not pay. Is the strategy to hold BDO International responsible for the judgement by showing that it’s all for one, one for all? The member firms then must pony up and pay for the sins of BDO Seidman? If BDO Seidman or any other member firm of a global accounting network screws up, you can now hold a larger group accountable for the good of the public trust?
Or is Thomas limbering his fingers and toes for the big prize, US$1 billion dollars or more from KPMG International for New Century? Is Thomas going to be the one to bring the monster suit against PwC International for Satyam? I think the PwC case will claim damages of more than US$1 billion dollars. If he gets it right with BDO International, he or any of the others such as Stuart Grant who brought the case against Deloitte International for Parmalat, will have a good template. And he will have poked a hole the size of a Mack truck into the previously impermeable accounting firm “global network” sham structure.
Update: Just reviewed the clips of Mr. Thomas, the plaintiff’s attorney, with a friend here at the Ferrara Bakery. He’s a criminal defense attorney. Usually works with guys whose names end with vowels, but well, I have likened the audit firms to the Mafia… Anyway, he says Mr. Thomas is using some very tried and true techniques here, especially if the jury is a group of ordinary people who are not well versed in the issues at hand.
- “Rule of three” means repeating your points three times, to help the memory of the jury and get it in transcripts repetitively.
- “Looping” means repeating what the witness says and prefacing your next question with his last statement. This also reinforces answers and gets them cited repeatedly in transcripts that will be reviewed later by the jury during deliberations.
- Using techniques usually reserved for cross examination during direct testimony such as the attorney providing “testimony” and content himself so that the witnesses answers are short and sweet, yes and no, I agree, you’re right, etc. This is especially helpful here with Mr. Van Elten as he seems to be a soft spoken, European gentleman. They had several problems with audio quality and his microphone at the beginning of his more than an hour long testimony. Mr. Thomas’ use of this technique may have been because he was given permission to treat this witness as “hostile” or the judge may be permitting it because of the complex nature of the case. We shall see.
In any event, it’s hard for me to feel comfortable with a case so complicated, hinging on international law, principal agency as it relates to a global member network, and accountancy being decided in this way by a “jury of our peers.” No disrespect to the citizens of Florida, but will it provide the most definitive, irrefutable soluton to an important issue, no mater what the outcome?