Professional Services Monitor: Today

UK’s Accountancy Age analyzes BDO Seidman’s future as it appeals the verdict in the ES Bankest case, and also takes a look at the impact on BDO International and BDO Stoy Hayward, the UK member firm of BDOI.

Firms in the UK are desperately keen on boasting about their US counterparts – until they hit trouble, that is.

KPMG’s tax issues in the US were one thing. BDO’s problems with its US firm BDO Seidman look equally troubling.

The article notes that BDO Seidman’s appeal is pending and that the firm has a strong track record of defending itself against lawsuits. “Admirably, perhaps, it does not just pay out.” Furthermore, BDOI has defeated an effort to make it jointly liable in the suit, and BDO Stoy Hayward remains “relaxed” regarding the claim. However, should something happen to BDO Seidman, that attitude would change.

The alternative could be extremely worrying for BDO Stoy Hayward in the UK, which relies on Seidman for its exposure to the US. Its clients with US operations need Seidman’s assistance there, and it will get referrals from there too.

The Financial Times this afternoon has an article on a new study from The Corporate Library on how the audit industry has changed since 2001.

In a sign of the explosion in audit activity since the passage of the Sarbanes-Oxley compliance law, the median fees earned by the world’s top auditing firms shot up by 345 per cent in the five years to 2006, a study said on Wednesday.

The findings came in a study of 100 auditing firms and 1,300 companies by The Corporate Library, a respected US corporate governance research firm which billed it as “the most extensive study of the audit industry ever published”.

More information on the report is at The Corporate Library website.

Ames Research Group also tracks audit fee data, processing about 40,000 proxy filings since February 2001. Some of this data is available in our 2007 Big Four Annual Report.

Link: Top auditors’ median fees up by 345 per cent – Financial Times

On Monday, BusinessWeek published an article on the new face of the old consulting-services businesses at the Big Four. Specifically, the article discusses Deloitte Consulting and the serendipitous collapse of the deal to spin-off the consulting in March 2003. Since then, Deloitte has continued as the only of the Big Four to have a major consulting practice named as such. E&Y sold its consulting practice to Cap Gemini; KPMG spun-off its consulting business to become BearingPoint; and PwC sold its consulting division to IBM to become part of IBM Global Services. And in the luckiest break of all, Andersen Consulting completed its prolonged and painful departure from Arthur Andersen in August 2000 to become Accenture.
Deloitte bucked the trend by keeping Deloitte Consulting under the same roof. Not only did it retain the business, as the article details, Deloitte has made the consulting business even more integrated with the audit and tax practices.

At Deloitte, partners say consultants are far more intertwined with the rest of the business than ever before, starting with their wallets. The SEC outlawed the practice of paying auditors based on non-audit work. So now Deloitte has one big pool of profit that auditors, tax experts, and consultants all share. Audit partners can still refer business to their consulting counterparts, but they only benefit in a broad sense, no longer directly. “Teaming became our mantra,” says Salzberg. James Quigley, chief executive of the global firm, Deloitte Touche Tohmatsu, says the U.S. firm’s array of services makes it “a category of one.”

But, as the article continues, the rest of the Big Four might quibble with Quigley’s assertion of Deloitte’s singular station in consulting. “And it hasn’t taken long for the other audit firms to do the math, and quickly rebuild their own consulting arms. KPMG Worldwide last year sold $5.3 billion of consulting, a 12% jump from the year before; PricewaterhouseCoopers (PwC) $3.7 billion, up 20%; and Ernst & Young $2.4 billion, a 2% increase.” As a Deloitte consulting executive told me even three years ago, “I know the rest of the firms have consulting, even if they’re aren’t calling it that anymore, because they’re bidding against me for the same consulting work.”

Link: Consulting Pays Off for Accountants Again – BusinessWeek

With BDO Seidman’s future in the US audit market now the subject much speculation and discussion, it might be useful to look just how big their US marketshare is.

BDO Seidman audits approximately 305 US-based “public” companies—meaning they file a 10K with the SEC. Not all of that number are currently trading. Furthermore, this excludes mutual funds and benefit plan audits. By that measure, BDO Seidman is the the 2nd largest 2nd tier firm, behind Grant Thornton with about 50 more clients. KPMG is the closest Big Four firm, with almost 3 times more clients.

Those 305 clients represent between $75 and $80 billion in annual revenue audited by BDO Seidman. Using quick, automated look at market capitalization from Google Finance this morning, BDO Seidman audit clients total approximately $95 billion in client market capitalization. In fiscal 2006, the firm received $156 million in audit fees from about 210 clients, as disclosed on company proxy statements. For comparison, Grant Thornton had $171 million from 260 audit clients in fiscal 2006.

Among BDO’s largest clients are Barnes & Nobles, Jones Apparel, and Forest Labs. Notable audit engagement wins for BDO in 2007 include Westaff (from Deloitte), Cambrex (from PwC), and Spartan Motors (from E&Y). The firm has been the auditor for two IPOs this year, but both are small, developmental stage companies. Furthermore, BDO, as a smaller firm, has a large client base among private companies, including PBS, Red Apple Stores and Colonial Group.

Jeremy Newman, managing partner of BDO Stoy Hayward, BDO International’s member firm in the UK, regularly posts to his blog. Last night, he made a brief comment on BDO Seidman’s verdict in the ES Bankest lawsuit.

It is not for me to comment on the US judicial process save to note that it is very different to that in the UK. BDO Seidman are confident that the jury’s findings will be overturned on appeal. Indeed they have been successful in a number of other claims which went against them at initial trial but were ultimately reversed. Large claims against major accounting firms are an unfortunate feature of professional life in the USA.

As with ourselves, BDO Seidman has enjoyed strong growth in recent years which reflects the strength of that firm. It remains capable of handling work for any of our clients operating in the USA and is a key part of the BDO International global network.

The comment is decidedly at arms-length, but it is an acknowledgment from BDO leadership, even if it is from the UK firm.

Mr. Newman also references a statement issued by BDO Seidman, but there is still nothing to be found at bdo.com.

The jury reached a decision regarding punitive damages yesterday in the BDO/ES Bankest trial.

A jury on Tuesday ordered accounting firm BDO Seidman to pay more than $351 million in punitive damages in a negligence case, bringing BDO’s potential liability in the case to about $521 million.

The jury had found BDO negligent for failing to find massive fraud in its audits of a financial services company backed by a Portuguese bank. The amount will be added to the same jury’s award of $170 million in compensation to the bank, Banco Espirito Santo.

In court filings, BDO Seidman had warned that a loss of $170 million could trigger massive layoffs and cause the company to lose its standing as the fifth-largest accounting firm. The jury was barred from issuing damages that could destroy a company.

In testimony Tuesday, BDO Seidman attorney Adam Cole asked the company’s chief executive, Jack Weisbaum, whether the firm’s financial operations would stay the same if it had to pay punitive damages.

“Probably not,” Weisbaum said. “It would be very difficult. We certainly wouldn’t look the way we do now.”

This Washington Post article has more interesting details about BDO and the case.

• BDO’s net worth for fiscal 2006 was $171 million
• BDO’s fiscal 2006 revenue was $589 million

Last night, the jury in BDO/ES Bankest suit ruled that BDO must pay $170 million in damages for “gross negligence.”

The award raises a question mark over the financial future of BDO, which last year argued in court papers that such a decision could undermine its standing as a national accounting firm and lead to the layoff of thousands of employees. BDO is one of the second-tier of national accounting firms.

A spokesman for BDO said last night that the firm “intends to ask the trial court to set [the award] aside and, failing that, to appeal.” He added that, “the firm has a track record for successfully appealing these jury verdicts.”

But the worst may be yet to come. The jury will now decide whether and how much in punitive damages to assess against BDO. Under Florida law punitive damages can be triple the amount that investors initially claimed, or $170 million.

This case has been notable for a couple reasons. First, in January, the Wall Street Journal noted that BDO was one of few major firms that was willing to take major cases to trial. Then, in June, the jury in the case ruled that the firm was negligent, and BDO stated that the $170 million negligence liability would jeopardize its future as a national firm.

While the firm will appeal and no huge penalty check has yet been written, the firm has been at least partly hit with the legal penalty that BDO’s legal statements say puts the firm’s future at risk. And yet, BDO has still not made a public statement about the matter. As of this morning, firm’s website still has no information about the suit.

In June, BDO Seidman was found negilent in a fraud case involving a defunct Florida factoring company, ES Bankest. After a Wall Street Journal article mentioned BDO’s track record of taking cases to trial, versus the Big Four practice of settling, we have been following the case. The penalty in the case is still yet to be decided, and BDO has said in court filings that the maximum penalty of more than $500 million would jeapordize the firm’s future.
A brief survey of news this afternoon shows that the penalty has not yet been decided. What was interesting is that BDO’s website has no current information on the case, despite being revised no longer ago than July 24.
No one likes to repeat negative news on oneself. However, in this case, others are telling BDO’s bad news without the firm giving its own view of the situation.
At least two objections come to mind, arguing for BDO not making its own public statements. First, the public has no interest in another accounting firm spinning bad news. Second, it’s bad practice to comment on a case still in litigation.
While both objections have some validity, management’s responsiblity to the firm’s partners and employees outweight these and other concerns. If the firm is, as it has itself said, in the fight for its very existence, the firm must not let the message be told exclusively by others. Regarding any legal concerns, a simple recitation of the current and settled facts of the case would seem to be beyond all but the most hypersensitive of legal objections. The firm could issue a press release consisting of nothing more than the standing of the case at the time, and what appeal or remedy the firm intends to make. After satisifying the legal concerns, it is the management’s responsibility to in some way “spin” the story. It is the firm’s duty to protect itself competently. And a competent defense can abosolutely be made while holding to the highest ethical standards.