Northeast Mortgage Corp. v. Robison, Hill & Co.; Northeast Mortgage Corp. v. Kahan Steiger & Co. P.C.
A public accountant that allegedly fails to detect a company controller's embezzlement and to comply with accounting standards of the American Institute of Certified Public Accountants can be ordered to return a client's payments and to pay a client's attorney's fees to resolve tax liabilities and penalties, if any. Allegedly, the defendant public accounting firms did not properly apply generally accepted accounting principles and auditing standards and failed to detect material misstatements in company financial records that indicated embezzling and nonpayment of tax obligations. The plaintiff's company controller allegedly had unfettered check writing authority and unilateral access to the company's computer network and all incoming mail that permitted her to misreport and to embezzle funds. The plaintiff, Northeast Mortgage Corp., sued the defendant auditors, alleging breach of contract and negligence, because the defendants allegedly failed to detect the company controller's malfeasance. The defendants did not dispute that the company controller allegedly engaged in defalcation, larcenies and forgeries between 2000 and 2007, and that there were serious tax consequences for the plaintiff that allegedly led to loss of credit, business opportunities and relationships. The plaintiff's expert witness, Eric Wallace, credibly testified that the defendant auditors did not comply with accounting standards of the American Institute of Certified Public Accountants or follow auditing field standards. Allegedly, the company's account payables and accrued expenses were combined so that they were not distinguishable. After a bench trial, the court concluded that the plaintiff proved that the defendants breached their duties and departed from the standard of care of the American Institute of Certified Public Accountants. The court was not persuaded that the plaintiff's chief executive officer, Brian Rogerson, was contributorily negligent, because he allegedly did not pay attention to the plaintiff's general ledger accounts, the company controller's alleged deceptions and inquiries made by agents of the Internal Revenue Service. The plaintiff proved that the defendants breached their contracts and that the plaintiff is entitled to the return of payments for audits, plus attorney's fees to resolve tax liability with the Internal Revenue Service and penalties, if any, charged by the IRS and state authorities.