When Does an Accounting “Review” Become an “Audit”, and Why Does it Matter
In Town of Kinderhook v. Vona, 2016 N.Y. App. Div. LEXIS 1220 (3d Dep’t 2016), the Appellate Division, Third Department denied an accountant’s motion for summary judgment, holding that questions of fact existed as to whether the accountant was engaged to perform a simple review of his client’s checking account, as opposed to an audit-level examination. Whereas a written retainer agreement may have resolved these questions, the parties had not entered into one. Accordingly, evidence regarding the scope of services provided by the accountant had to be gleaned from deposition testimony.
The Town of Kinderhook employed the same bookkeeper from 2002 until 2010. In 2008, the Town’s Supervisor, Douglas McGivney, discovered that the Town was experiencing cash flow problems and that its bookkeeper had deposited a large personal check into the Town’s bank account. McGivney contacted Leonard Vona, a CPA and certified fraud examiner, “to look into the situation.” No written agreement was reached as to the nature and extent of Vona’s services, but an accountant in his firm reviewed documents provided by the Town (i.e., documents which had been given to the Town by its bookkeeper). In December 2008, Vona issued a report finding no cause for suspicion with regard to the check or any other payments made on the Town’s behalf by its bookkeeper. Vona was compensated for his report and the work performed by his firm.
In 2010, the Town discovered that its bookkeeper had falsified the records provided to Vona, and that she had embezzled over $400,000 from the Town from January 2007 until she was let go in 2010. The Town commenced an action against Vona alleging that he and his firm breached the terms of their contract with the Town and were professionally negligent in failing to uncover the bookkeeper’s fraud.
After discovery was complete, Vona moved for summary judgment. He asserted that his firm was not retained to perform an audit, and therefore, could not be held liable to the Town for failing to properly perform one. Vona also asserted that any alleged failures by his firm were not the proximate cause of the Town’s damages.
In support of his motion, defendants submitted the affidavit of a CPA who characterized Vona’s work as “a limited assignment to make findings based on documents provided by [the Town], and opined that [Vona] had no duty to obtain the original baking documents in this non-audit because they had no authority to do so.” Vona’s expert also asserted that any losses sustained by the Town “stemmed from the absence of internal controls over [its] finances.”
In opposition, the Town’s expert “stated that examining financial records to determine whether funds were being handled improperly was an ‘audit-level service.’” He further opined that, regardless of whether Vona was hired to conduct an audit or a less intensive review, he “deviated from professional standards by failing to conduct a thorough investigation or otherwise explaining to [the Town] that the original banking records were essential to performing one.” As for causation, the Town asserted that the fraud perpetrated by the bookkeeper would have been discovered had Vona “acted according to professional accounting standards and obtained the original, unaltered banking records,” and therefore, Vona’s “departure from those standards allowed the embezzlement to continue.”
The Court observed that “Vona was plainly engaged to do something,” insofar “as he tasked a subordinate with examining records provided by [the Town] to determine if there were overt problems,” and he billed the Town for reviewing its checking account. More specifically, Vona had issued a written report reflecting that he had been hired “to examine documents and records of [the Town] for the direct purpose of offering opinions regarding those documents” and making recommendations as to improved procedures. Based on the foregoing, the Court held that multiple questions of fact precluded summary judgment.
This case once again emphasizes the need for written retainer agreements to define the scope of services in any professional engagement. Further, when a report is issued, limitations on the use of the report should be stated. Otherwise, the client may reasonably assume that the opinion covers more than the subject matter intended by the professional. Finally, as it concerns accounting services, depending on the engagement, the accountant may have a duty to request original documents from the primary source as opposed to those documents provided by the client or its agent, particularly when the circumstances point to the possibility of fraud, which was clearly the case here. Again, all of this could have been avoided with a retainer setting forth the scope of the engagement, or a report which explicitly stated it could not rule out fraud, due to the limited review performed.
If you require further information regarding the content of this alert, please contact Dennis R. McCoy, Chair of our Professional Liability Practice Area, at (716) 566-1560 or firstname.lastname@example.org.
- New Cybersecurity Regulations May Apply to Companies that do Business with NYS Chartered Or Licensed Banks, Mortgage Bankers, Insurance Companies and Others
- New York State Department of Financial Services Finalizes Cybersecurity Regulations
- Insurance Agent Held Not Liable for Alleged Failure to Obtain Flood Insurance Coverage