BDO may bail out Spanish sister firm after hefty audit fine

13 October 2020 3 min. read
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The global network of audit and advisory firm BDO – including its UK office – may be forced to bail out its Spanish wing, after it was stung with a massive penalty for its alleged role in an accounting scandal. BDO was handed a fine of more than €120 million by Spain’s highest criminal court after it ruled two-years-worth of accounts at fishing firm Pescanova had been falsified.

Galician fishing company Pescanova was once a household name in Spain, and one of the world's largest fishing groups. Founded in 1960 by José Fernández López, who established the company in Vigo, the company rapidly expanded to more than 120 fishing boats, and sold 150,000 tons of fish products into the global market every year, seeing it rank among the top 5 companies in its sector.

Besides the Spanish facilities, the company also had production plants in 21 countries, including Portugal, Nicaragua, Namibia and Honduras, with an international headcount of more than 10,000.

In 2013, however, the firm filed for bankruptcy protection, having been rocked by an accounting scandal. Initially the company filed for insolvency citing debts of €1.5 billion it said had been run up to fuel expansion, before the economic crisis hit its earnings. However, after missing an official deadline to present audited 2012 accounts, Pescanova suspended its auditors BDO, and hired accountants from Deloitte and KPMG to carry out a forensic analysis of its books.

BDO may bail out Spanish sister firm after hefty audit fine

What soon became clear was that a tangle of subsidiaries had been set up “solely and uniquely” to hide the firm’s debts, as one source close to the story put it. Another described the debacle as “Enron, Spanish style,” as it emerged the group had more than 100 offshoots, in many of which the group held less than 50% of the equity so as to avoid including their debts in its accounts.

KPMG report made public following the scandal was damning. It stated to the Spanish stock market regulator, "In the last financial periods, practices were designed and set up whose object was to present a group financial debt smaller than the reality and, as a consequence, results that were larger than those actually generated.”

Over the following seven years, professional services firm BDO has subsequently been under the microscope for its role as auditor for Pescanova between 2010 and 2012, when the accounting discrepancies occurred. Following a court case at the Audiencia Nacional – Spain’s highest criminal court – BDO was named as among the firms and individuals convicted of involvement in falsifying the accounts of Pescanova. This included a prison sentence of three years and six months for the BDO Partner who signed off Pescanova’s accounts.

On top of that, BDO is apparently facing the prospect of paying a significant portion of a €126.8 million compensation package, which the court ruled should reimburse investors for their losses. As reported by The Guardian, BDO has said it will appeal the decision, and it remains unclear just what proportion of the compensation would be shouldered by BDO should that appeal fail. However, the ruling is understood to have caused concern in the global professional services firm.

While BDO Spain is a separate legal entity to the operations of other countries, the size of the fine it faces may require a bail out from its sister companies, including the firm’s UK office. At present, BDO UK has not commented to the press on the matter, however BDO did tell Spanish news outlet Europa Press that it believed itself was a victim of the fraudulent accounts, and had been “deceived” by Pescanova management.