Accounting Malpractice Claim Based on Failure to Discover Client’s Not Defeated by Fact that Accountant Was Not Engaged to Perform an Audit

On April 4, 2024, the First Department issued a decision in 1650 Broadway Assoc., Inc. v Sturm, 2024 NY Slip Op. 01864, holding that an accounting malpractice claim based on a failure to discover a client’s fraud was not defeated by the fact that the accountant was not engaged to perform an audit, explaining:

Plaintiffs sufficiently pleaded causes of action for accounting malpractice and aiding and abetting fraud, which are not utterly refuted by the documentary evidence.

A party alleging a claim of accountant malpractice must show that there was a departure from the accepted standards of practice and that the departure was a proximate cause of the injury. . . .

Defendant makes no contention that the claims of accounting malpractice and aiding and abetting fraud by Kenneth are not sufficiently pleaded. Instead, defendant primarily argues that the malpractice and fraud claims are refuted by the fact that the accounting firm was hired to prepare tax returns and other financial statements that documented the loans at issue, and thus that investigating and reporting Kenneth’s alleged fraud were beyond its duties.

Plaintiffs’ claims, however, are not that defendant was hired to discover Kenneth’s wrongdoing, but rather that information obtained by defendant during its business interactions with Kenneth and information used by defendant in order to prepare tax returns and financial statements put defendant on notice about the impropriety of Kenneth’s loans to himself such that defendant had a duty to inform plaintiffs of the questionable payments. The law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent. . . .

Alternatively, defendant argues that the claims of accounting malpractice and the claims of aiding and abetting fraud are refuted by the fact that the allegedly improper loans were included in the tax returns and financial statements, which plaintiff Ellen had a duty to review. However, while plaintiffs’ own negligence in monitoring Kenneth’s activities in managing the Diner may have been a factor in enabling Kenneth to continue his alleged fraudulent scheme for several years, the pleadings and documentary evidence submitted do not show that such negligence was the sole proximate cause of the Diner’s loss. It has not been established that such negligence impeded defendant’s duties to reveal to plaintiffs what it knew about Kenneth’s alleged improper conduct regarding the loans.

(Internal citations omitted).

Stay informed!
Sign up for email alerts and notifications here.
Read more about our Complex Commercial Litigation practice.