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One of First Brands’ creditors is suing BDO for negligence, claiming the audit firm should have spotted red flags in the car parts maker’s accounts long before it collapsed last year.
Black Diamond, a prominent hedge fund group that held $70mn of First Brands debt, filed a lawsuit in an Ohio state court on Wednesday claiming damages totalling at least the value of its investment.
The suit is the first against BDO since its client went bankrupt in September, roiling the market for private credit and prompting prosecutors to file fraud charges against First Brands’ founder and his brother. The two pleaded not guilty to charges in February.
The case will brighten the spotlight on BDO, which issued unqualified audit opinions on First Brands’ accounts every year from 2021. Earlier this week, a court-appointed examiner investigating the car parts maker’s collapse said an executive at First Brands believed BDO had been picked because it would be “less rigorous” than another auditor.
Citing BDO’s statement last year that it had no knowledge of any off-balance-sheet debt at First Brands, Black Diamond alleged that a proper audit would have identified both the need for and the existence of such borrowings.
“A properly planned and conducted audit, with the auditor applying due professional scepticism to contradictory or implausible information, would have detected red flags, inconsistencies and evidence requiring further investigation,” Black Diamond claimed in its lawsuit, which incorporates some of the examiner’s allegations.
“Had BDO done its job, it could never have issued a single unqualified audit opinion on the company’s financial statements, much less the five such opinions it ultimately issued,” Black Diamond added.
The audit firm called the lawsuit “meritless and not in any way based on any visibility or knowledge about the audit procedures performed by BDO”. It said it performed its work for First Brands in line with professional standards.
“The complaint casts allegations about the nature of the First Brands fraud, but doesn’t identify a single audit procedure that BDO supposedly didn’t perform that in the judgment of any expert would have discovered the fraud,” it said.
“This is presumably so because the professional standards that apply to BDO’s audits of First Brands expressly contemplate the inability of an auditor to detect the kind of collusive fraud perpetrated by First Brands.”
