Professional Liability Matters

For the second time in a few weeks, the Second Circuit dismissed a securities fraud claim targeting an independent auditor. In Special Situations Fund III QP, L.P.,, the Court was tasked with reviewing the trial court’s dismissal of plaintiff’s second amended complaint. The underlying allegations were that the company disclosed that its former CEO and other executives had committed fraud for years by misstating its financials and embezzling funds. Plaintiff alleged that the company’s independent auditor committed securities fraud by issuing a “clean audit opinion” of the company. Ultimately, the Appellate Court upheld the dismissal on the grounds that the plaintiff failed to properly plead the requisite element of scienter.

Unlike most malpractice scenarios, alleged negligence is not enough to sustain a claim in the context of securities fraud against an independent auditor. Rather, in most jurisdictions the plaintiff must establish that the audit was of such little value that it was a “pretend” audit which provided no benefit. Alleging that the auditor could have done more is insufficient absent properly pled allegations that the auditor maintained an evil intent or acted with reckless conduct. This standard is fairly well-developed. Yet, the exposure is often considerable and “victims” of alleged fraud committed by public companies continue to target the independent auditors engaged to audit those companies. A recent decision out of the SDNY highlights another victory for the defense community in securities fraud cases targeting an auditor.

April 15 is looming. For tax professionals across the country, the emergence of spring also means it’s time to hunker down to prepare tax returns. In the midst of preparing returns and meeting deadlines, tax professionals must also consider the reality that tax advice and return preparation reportedly result in the greatest number of claims against accountants. Some good news is that there are common themes amongst the types of claims facing tax professionals which provide insight and valuable lessons. In particular, the IRS publishes an annual list of the “dirty dozen” tax scams which can provide an important risk management tool to the APL community. In its recently published 2014 list, identify theft and phone scams top the charts.

Many professionals travel frequently. Hence, professionals may accumulate various rebates, discounts, frequent flier miles or “cash-back” as a result of travel or credit-card incentive programs. Over the years there has been some chatter amongst tax-preparers as to whether those travel-related or purchase perks are considered taxable income. Let’s take a closer look at this risk management issue facing the accounting profession.

It is inevitable that blame will be cast on the auditor: when an investment tanks, when embezzlement is discovered, when stocks take a plunge. It is the independent auditor that concluded that the financial statements were presented fairly and therefore the auditor should have uncovered the ______________. Many plaintiffs follow this script. As a result, the defending auditor is left to argue that he is not responsible for the intentional acts of others or unforeseen changes in the underlying client’s business. This defense requires a fact intensive debate and the involvement of CPA experts; i.e. it’s expensive. A recent decision out of California, however, provides a strong argument for auditors that the plaintiff must establish actual reliance on the audit report in order to prove a claim.

A recent decision in a closely watched accounting malpractice matter – the first of its kind initiated by the FDIC – may suggest cause for concern for accountants. As receiver for a failed bank, the FDIC may sue professionals who played a role in the failure of the institution. In the wake of recent bank failures, the FDIC has targeted officers and directors, attorneys, and brokers. Until recently, however, the FDIC had not pursued an audit firm. That all changed on November 1, 2012 when the FDIC, as receiver for the failed Colonial Bank, initiated a $1 billion malpractice claim against the bank’s auditors PricewaterhouseCoopers and Crowe Horwath. This lawsuit, and a recent decision denying the defendants’ motion to dismiss, raise critical questions.