Faulty Audit Lands Accountant in Hot Water

The most common forum for malpractice claims is civil litigation. However, a professional may find himself in a potentially worse situation if the appropriate professional regulatory board also gets involved. Take for example a recent case of accounting malpractice that demonstrates the serious side effects that can occur when an accountant falls short of the standards of the profession.
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Lessons from Largest U.S. Tax Fraud in U.S. History

If you are in the world of finance, accounting or tax chances are you have probably heard of Sam Wyly and his late brother Charles Wyly. In recent years, the business mogul brothers have been the hot topic of litigation as they battled with the IRS and SEC over alleged tax and securities fraud that may have spanned decades. In the most recent decision to come out of the Wyly saga, Sam Wyly was ordered by a Dallas bankruptcy court to pay $1.1 billion in back taxes, interest and penalties. While the litigation is noteworthy because of the massive amount of dollars involved, it can also provide some reminders for tax professionals, particularly those with sophisticated clients.
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In Pari Delicto Not Enough to Save an Accountant

In the face of corporate fraud and deceit, it is not uncommon for the defrauded entity to turn on its professionals. The inevitable issue becomes who is responsible for overseeing the enterprise: the business entity or the independent professional? Perhaps both. The in pari delicto affirmative defense can be an effective tool for professionals to shield themselves from liability arising from alleged wrongdoing of their underlying client. For example, we previously posted a victory for an accountant who successfully asserted the defense here. But, how and when to assert the defense is tricky as evidenced by a recent Pennsylvania District Court decision.
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Tax Consequences of Employee Wellness Programs

Employee wellness programs are all the rage. While the concept is still relatively new, the potential implications of such programs are still being ironed out. Consider for example our recent post about how such plans can comply with other existing federal regulations. As employers struggle to make sure that their programs comply with existing regulations, another aspect of the employer wellness programs cannot be forgotten: taxes. The potential tax implications for both the employer and employee are an important aspect of any wellness program. In a recent Chief Counsel Advice (CCA) the IRS addressed what constitutes taxable income when benefits are provided to employees through a wellness program. Employers and tax-preparers should take note.
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Auditor Security Fraud: Negligence Not Enough Part II

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.
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Auditor Securities Fraud: Negligence isn’t Enough

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.
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No Concurrent Causation = No Coverage

The doctrine of concurrent causation can apply in many different insurance coverage scenarios. The doctrine provides that if two causes - one covered by an insurance policy and the other excluded by the policy - both contribute to a loss, then coverage should be afforded under the policy. The doctrine would seem to expand coverage in scenarios where a potential exclusion might otherwise preclude it. Seems simple, right? Not always. Take for example the following APL case where the court found the concurrent causation doctrine did not apply and coverage was denied.
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Limitation on Liability Clause Not Enough to Protect Accountant

Here at PL Liability Matters we have written on numerous occasions about the importance of an engagement letter. The engagement letter is a critical tool for setting expectations and managing risks. As we have said before a well drafted engagement letter can deter malpractice claims and in meritless suits it can be “Exhibit A” to a dispositive motion. A case out of New York involving an accountant-client relationship demonstrates just that scenario. Unfortunately in this case, however, the court found that the engagement letter did not sufficiently limit the risk to the professional in order to avoid the malpractice claim.
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Accountants: You’re Privileged Too

The accountant-client privilege doesn’t seem to get as much attention as the other more commonly used privilege defenses such as attorney-client or doctor-patient. However, a case out of the Illinois Supreme Court earlier this year is giving the other “a/c privilege” a lot of press. While not all states recognize this privilege, the ones that do generally find that the client is the holder of the privilege and requires the client’s consent to disclose any information exchanged between the accountant and client. Illinois, however, has decided to take a slightly different approach.
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The Tax Professional’s “Dirty Dozen” List

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.
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