Advisors Can Become Scapegoats for Troubled Businesses, Attorney Warns

BOSTON, May 10 /PRNewswire/ -- When the Internal Revenue Service went after two Deerfield, Mass.-based businesses for unpaid payroll and sales taxes, the president and CEO of those companies sought to pin the blame on an outside Certified Public Accountant. And while a Franklin County jury cleared the accountant of all wrongdoing after deliberating for just two hours on April 22, the case nonetheless highlights how outside advisors face greater risk of becoming scapegoats amid today's troubled economy, said Nancy M. Reimer, the veteran LeClairRyan attorney who successfully defended the CPA in the three-day trial.

"An unfortunate consequence of the so-called Great Recession is that business owners are increasingly trying to pass responsibility for their financial failures to their outside advisors," said Reimer, a Boston-based shareholder in LeClairRyan, who focuses her practice on defending professionals against malpractice claims. "Outside accountants and other professionals must be especially cognizant of this risk—and take extra steps to protect themselves."

Even if the potential claim against an advisor is weak, Reimer added, cash-strapped companies will often sue anyway in hopes of winning a settlement from the advisor's insurance company. "Plaintiff's attorneys are well aware that some insurance companies are prepared to write off settlements as a cost of doing business and would rather pay than fight back in court," she said. "By insisting upon client engagement letters with clear and detailed contractual terms, as well as by carefully documenting their actions and conversations once they are on the job, advisors can dramatically reduce their liability exposure."

Indeed, both of those steps might have helped the CPA in the aforementioned case avoid becoming a target of litigation, Reimer noted. The trial, which was held in Franklin County Superior Court, hinged on whether the CPA had notified the CEO of both Deerfield Valley Re-Fab and Deerfield Valley Crane Services of unpaid payroll and sales taxes for the two companies. "The CPA repeatedly raised the issue of the taxes with the controller who assured the CPA that he had, in turn, raised these issues with the CEO," Reimer said. "The CPA's conduct was utterly professional and ethical, but it is always good to document such client conversations in writing."

The importance of this was underscored by the sudden death of the controller, who suffered a massive heart attack prior to the trial. Reimer succeeded in persuading the court to allow the CPA's accounts of his conversations with the controller to be admitted as evidence. Otherwise, they would have been disallowed under the Hearsay Rule, significantly hampering her client's defense. "Winning admission of those statements was critical to the case," Reimer explained. "In my closing, I was able to argue that the controller had told the CEO about the unpaid liabilities. I also showed that the controller had put a priority on paying other financial obligations of the two companies—including rent payments for buildings owned by the CEO himself—and that the CEO had taken out $87,000 from his companies, as 'loans' to himself, over a two-year period. That was money that could have been used to pay his looming tax bills."

An engagement letter spelling out exactly what the CPA's responsibility were to these businesses, and how much he was to be paid for those services, would have further limited his liability exposure, Reimer added. "One of the allegations in this case was that somehow the outside CPA was supposed to oversee the job of the controller," the attorney noted. "That is not what a CPA does, but an engagement letter putting the CPA's responsibilities in writing would have rendered any such allegation nonsensical." Moreover, documentation of the advisor's fees can serve an important purpose: making it far more difficult for the client to dispute those fees, Reimer said.

"In the Deerfield case, we persuaded the jury to award the CPA $8,000 in fees that the companies had failed to pay. Again, a clear contractual agreement signed by the client would have made it more difficult for the client to argue it didn't owe the CPA those fees," Reimer said. "Also, the plaintiff's attorney had sued the CPA for approximately $250,000. That is remarkable—someone hired to do $8,000 worth of work was exposed to $250,000 in liability. In an engagement letter with an accountant, a clause can be inserted that says, essentially, 'This advisor is liable for no amount greater than the fees paid for services rendered.' "

With business failures occurring across a wide swath of industries, accountants and other outside advisors should consult with their legal counsel on industry-specific best practices that can help reduce their exposure amid this greater risk, Reimer noted. "Our client in this case was a conscientious, highly professional and ethical individual," the attorney said. "Nonetheless, he became a target of litigation. That should be an object lesson to outside advisors everywhere."

About LeClairRyan

Founded in 1988, LeClairRyan provides business counsel and client representation in corporate law and high-stakes litigation. With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has more than 300 attorneys representing a wide variety of clients throughout the nation. For more information about LeClairRyan, visit www.leclairryan.com.

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