The Accountant/Attorney Liability Reporter: February/March 2010

Inside this Issue

Accountant Liability for Third Party’s Embezzlement

By Cheryl A. Waterhouse, Esq.

An accountant who has a fiduciary or special relationship with a client may be held liable for a third-party’s embezzlement if the accountant refers the client to the third-party and fails to disclose material facts or makes representations on which the client relies. In general, one does not have a duty to protect another from a crime unless a special relationship exists. Although most business relationships are not fiduciary relationships, an accountant may be held to be a fiduciary in circumstances where a client justifiably relies upon the accountant as a trusted advisor, as when an accountant renders personal financial, investment or tax advice to a client.

Threat of Tax Liability Enough to Hold Accountant Liable

By Michelle R. Epstein, Esq.

Damages are an essential element of a claim for negligence. In most states, a claim against an accountant concerning tax liability does not accrue until a taxpayer receives a tax assessment or other notice from the IRS, indicating the taxpayer has incurred damages. The Court of Appeals for the State of Ohio, however, recently held, in the case of Jodway Heating & Cooling, LLC, et al. v. Robert W. Stevens, Inc., 2009 WL 3068398 (Ohio App. 9 Dist.), that the threat of a tax liability, where no IRS assessment had yet been issued, is sufficient to sustain a cause of action against an accountant who allegedly caused the potential liability.

Illinois Judge Allows Bankruptcy Trustee Another Chance to Hold Auditor Liable for Fraud

By Justin M. Jagher, Esq.

An Illinois Court recently allowed a case by a bankruptcy trustee against an accountant auditor to proceed despite good arguments of in pari delicto – that a bad actor cannot sue another for aiding and abetting his own conduct – lack of loss causation and lack of support for the damages claim. The court dismissed the accounting malpractice claim because the auditors did not have a duty to the company to report the company’s fraud to regulators. The court also dismissed the damages claim based on its utter lack of plausibility. However, the court allowed the in pari delicto claim to remain based on the mere possibility of the trustee proving that the individual wrongdoers benefited. The court, thus, provided the trustee with another chance, allowing the trustee to replead the negligence and damages claims.

Existence and Potential Waiver of the Accountant-Client Privilege

By Douglas M. Marrano, Esq.

State and federal laws extend privileges against providing testimony against clients to doctors and attorneys. The law, generally, does not extend the same privilege to the accountant-client relationship. This issue recently arose in federal district court in Missouri. In Ayers Oil Co. v. American Business Brokers, Inc., the defendant, American Business Brokers, Inc. (“ABB”) attempted to subpoena records and deposition testimony from the plaintiff’s accountant regarding Ayers Oil’s financial condition.

Court Dismisses Securities Fraud Claim Against Law Firm

By Mark D. Szal, Esq.

A Texas Federal District Court recently dismissed a federal securities fraud claim against a law firm that participated in offering post-investment advice regarding a tax shelter scheme. The case, AFFCO Investments, LLC v. KPMG, LLP, 2009 WL 3248052 (S.D. Tex. 2009), involved a complicated scheme marketed by KPMG, whereby taxpayers with substantial income or capital gains could claim a tax loss by executing a series of transactions relating to European–style digital operations. The scheme involved the formation of several LLCs with a shell game of ownership interests. The LLCs, managed by independent entities, would enter into offsetting digital option contracts, eventually leaving the passive-investor plaintiffs with the promised apparent losses.

New York Court Awards Judgment to Homeowner Against Attorney Over Bankruptcy Advice

By Douglas M. Marrano, Esq.

A Long Island homeowner successfully sued his former bankruptcy attorneys for legal malpractice as a result of the law firm’s failure to properly advise the Homeowner regarding his ability to file a bankruptcy petition and for failure to advance reasonable defenses to halt a foreclosure.

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