“Never mud-wrestle with a pig. You end up
covered with pig-shit. And the pig actually likes it.”

There was palpable
relief on June 23 in the halls of international accounting network BDO’s firm
in the US, née Seidman. The Florida
Court of Appeals, reversing a potentially devastating $521 million jury
verdict, ordered a new trial of the claims by Banco Espirito Santo relating to
alleged faulty audits of the irregular accounts of Seidman's factoring company client Bankest.

Updating earlier
attention to this threat hanging over Seidman’s existence since 2007 (here, here and here), it is now right to look beyond the
predictable chest-thumping press releases of the adversaries (see here), and contemplate just who has won what.

Notably, to start,
Seidman lives to fight on.

Even though the
opinion (available here) makes clear that the appellate court would
not have let stand the $321 million in punitive damages imposed by the jury for
its finding of Seidman’s egregious conduct, the Seidman firm was still facing
disintegration. Being forced to pay only
the $159 million of compensatory or “ordinary” damages would have inflicted on its 273 partners the unsustainable obligation to work for nothing for a year or more (based on industry
profit margin data and Seidman’s reported fiscal 2009 revenue of $620 million –
here). 

Dealing not with
the merits, but only with the defects in procedure it found in the lower court’s
trial management, the appellate tribunal held that the claims of Seidman’s
grossly negligent conduct were inextricably “intertwined” with issues of
“causation, reliance, and comparative fault” – that is, in lay terms, that
Seidman’s allegedly bad behavior should have been evaluated by the jury in
context of the bad behavior of all the other actors in the sordid story of
Bankest.

So the
press-release confidence of Seidman’s CEO, that it “acted at all times
consistent with its professional obligations,” has been neither established nor
vindicated, but remains to be re-tested in another fulsome public proceeding.

As for the Banco
plaintiffs, the obligation to re-try the case is another reminder of the lawyers’
caution, to be careful of getting your wish from a trial judge. A lawyer who rings
the bell for a huge jury verdict, when the judge has put the bell-rope in his hands,
may walk with a little more clank in his swagger. But a judgment only really
counts as bankable when affirmed on appeal and collected.  

And while both sides will claim to have learned of their
courtroom strengths and weaknesses from the original trial, the very rationale
of the appellate rulings that require a new trial also gives a road-map for the
other side by which to by-pass the perceived speed-bumps the first time.

So with the
learning process a bi-lateral one, another go-round will feature re-treaded
strategies on both sides.

Which reinforces
the attitude of courtroom veterans, that second trials have the inevitably
stale air of re-cycled themes, witnesses and evidence – the very reason they
happen so seldom.

That sentiment plus
traditional analysis suggest that, under the appellate court’s signals about
the extent of the penalty against Seidman that it would sustain, the parties
will reach a settlement – one that to Seidman would be highly painful but
tolerable – in effect, the number of months its partners might stand to work
without take-home pay before they bolt for the exits.

On the other hand,
trials of life-threatening claims against the large accounting firms are so
rare as to make impossible either patterns or reliable predictions.

The Florida court
did make one observation of unintended and presumably un-ironic import:

“An
accounting firm that must distribute its net income and net worth to judgment
creditors rather than the partners who produced that income will not have
partners (or clients) for long.”

In other words,
even a small state’s intermediate judiciary recognizes that so long as the
large accounting networks are put to the hazard of litigating for their
survival, the entire global franchise of privately-provided assurance is at
risk.   

Critics of that structure,
who in essence dispute the very legitimacy of the firms’ business models (here), remain challenged to articulate an
achievable alternative that will offer sustainable value to the community of financial statement
users.

If the prolonged
and now-extended agony of Bankest
teaches nothing else, it is that the auditor-viability dialog is still not satisfactorily
engaged.

Thanks for joining this discussion. Please
share with friends and colleagues. Comments are welcome, as are subscriptions –
both at the
Home page.