The Court of Appeals recently upheld the dismissal of malpractice and fiduciary duty claims alleging that an accountant failed to “keep an eye” on the company’s controller who later engaged in a two year long embezzlement scheme, stealing over $400,000. Banker & Brisebois, Co. v Maddox, et al., unpublished per curiam opinion of the Court of Appeals, No. 310993 (April 29, 2014).
The plaintiff is a small company who worked with the defendant accountant since the late 1990s. The initial accounting firm engagement letter promised to inform the company of any material errors and any fraud or illegal acts that came to its attention.
Thereafter, the company hired a family friend to act as the company’s controller. She took over the day-to-day finances and bookkeeping of the company, limiting the accounting firm to preparation of taxes and annual balance sheets. Years after the controller was hired, her lifestyle changed drastically. She leased a sports car, joined a country club and began to take expensive vacations. The company was concerned that she was stealing and in 2003, requested a meeting with the accountant. The parties disagreed as to what occurred at that meeting with the accountant testifying that he was never specifically requested to do anything regarding the controller’s suspicious activity. The company however claimed that at the conclusion of the meeting, the accountant agreed that he would “closely watch for any signs of fraud” in light of their concerns. However, there was no dispute that the accountant and the company never discussed any concerns about the controller again following this meeting.
Six years later, the controller committed suicide. After her death, the company discovered that, beginning in 2007, she began to improperly authorize bonuses and forge checks to herself.
The company brought suit against the accountant and the various accounting firms he worked for during the course of their relationship, for failing to discover and notify the company about the controller’s theft. The company alleged claims for breach of fiduciary duty, malpractice and breach of contract based not only on the alleged agreement to “keep an eye on” the bookkeeper after the 2003 meeting but the accountant’s service of advising the company with regard to general business, profitability and employment matters.
The Court of Appeals affirmed dismissal of the breach of fiduciary duty claim finding that neither the accountant nor the accounting firm had a fiduciary relationship with its clients. The Court noted that the accountant-client relationship is not a traditionally recognized fiduciary relationship and that there is no Michigan caselaw which has held that an accountant generally owes a fiduciary duty to his clients without special facts to support such a heightened duty. The Court analyzed each of the cases where “special facts” were present and concluded that such facts did not exist in this case. In fact, the Court noted that the evidence presented was that while the accounting firm provided advice on various matters, the advice could be freely rejected, thus negating a fiduciary relationship.
The Court also rejected the argument that a fiduciary relationship was created because the company “place[d] trust in the faithful integrity” of its accountant and accounting firms. The Court noted that the placement of trust must be reasonable and it was unreasonable for the company to trust that the accountant would monitor and uncover the controller’s fraud when the company knew that the accountant was not conducting day-to-day or monthly financial reviews and was without access to the company’s bank statements or other income and expense reports. Despite the company’s 2003 suspicions regarding their controller, the company continued to permit her to reconcile bank statements. And, the Court found that it would not be reasonable for the company to expect that the accountant was “keeping an eye on” the controller after the 2003 meeting when management failed to follow up with the accountant to discuss the issue.
As for the dismissal of the malpractice claim, the Court of Appeals first noted that lower court improperly dismissed for failing to allege a breach of duty that was distinct from breach of contract. The Court of Appeals held that the malpractice and breach of contract claims were based on separate theories and therefore, the malpractice claim was not precluded simply because it arose from a contract for services.
The Court then went further to analyze whether the company created a genuine issue of material fact that the accountant committed malpractice. The Court found sufficient evidence that a duty existed and that the accountant breached his duty of due care in 2006 and 2009 by failing to follow up on accounting errors in information supplied to him by the controller and failing to follow up with management when the controller refused to provide a copy of the company’s general ledger for tax preparation purposes. However, the Court found that the company could not create a genuine issue of material fact that the accountants’ failure to report the 2006 and 2009 incidents was the proximate cause of its losses as the evidence demonstrated that the accountant was not provided with access to the vendor that processed the bonuses and was not tasked to reconcile the general ledger, which would have been the only way that the accountant could have discovered the fraud. As such, the dismissal of the malpractice claim was also affirmed.
The Court did reverse the circuit court’s dismissal of the breach of contract claims and remanded the case for further proceedings, including permitting the plaintiff to amend the complaint to add a breach of contract claim against the individual accountant. The Court found that the company created a genuine issue of material fact as to whether the successor accounting firm and the accountant breached both its written contractual obligations, which services arguably extended beyond simply providing tax return services to the company, and the alleged agreement to “keep an eye” on the controller.
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