Legal Liability
Professional liability claims have been the scourge of the accounting profession for the past 30 years and there is no end in sight. When faced with such claims accounting firms want to be defended by attorneys who are not only experienced litigators, but who also know and understand accounting and the professional standards under which accounting firms operate. Vedder Price’s Accounting Law Practice Group has been defending accounting firms for more than 25 years and has handled hundreds of professional liability claims against CPA firms. Two of its members are frequent speakers on the subject of accountant’s liability and have written the leading treatise on the subject (Accountants’ Liability published by the Practising Law Institute, 2003). In addition, one of its members taught accounting at the Columbia Law School and currently serves on the AICPA’s Auditing Standards Board.
Defending litigation against accounting firms requires an understanding of the legal doctrines that are peculiar to accountants’ liability cases, such as the continuous representation doctrine (under which the statute of limitations may be tolled), the privity doctrine (which precludes certain non-clients from asserting negligence claims), the National Surety/Lincoln Grain doctrine (which precludes an accounting firm from asserting the contributory negligence defense in certain cases), and the critical self evaluation privilege (under which peer review and other documents associated with internal quality control may be excluded from documentary discovery). In this connection, members of the Accounting Law Practice Group have been involved in a number of high-profile litigations in which the privity doctrine has been redefined, including Credit Alliance v. Arthur Andersen, Security Pacific v. KPMG Peat Marwick, Parrott v. Coopers & Lybrand and SIPC v. BDO Seidman.
One of the important defenses available to accountants in professional liability cases is the statute of limitations defense. That defense, however, differs widely from state to state, not only as to the length of time that a plaintiff has to commence his or her action, but also as to when the statutory period commences and what actions will toll the running of the statutory period. Moreover, each state is likely to have different time periods depending upon the nature of the claim that is being asserted. Click here for a table prepared by Vedder Price attorneys setting forth the various statutes of limitations utilized in each state and when the statutory period begin to run.
The actual extent of an accounting firm’s liability is often affected by statutorily imposed interest charges which also vary from state to state. In virtually all states, post-judgment interest is customarily awarded; i.e . interest from the date of the plaintiff’s judgment through the date the judgment is actually paid. In some states and under some circumstances, prejudgment interest may also be awarded from the date that the plaintiff is actually injured through the date a judgment is granted in his or her favor. Understanding the impact of statutory interest charges can often help in devising defense strategies; and to assist its attorneys Vedder Price has developed a 50-state survey of prejudgment and post-judgment interests charges, listing when they are available and at what rate interest accrues. That table may be viewed by clicking here.
Not every accountants’ liability case is actually litigated. Indeed, a great many liability claims are actually resolved without resort to litigation and others are resolved through alternative dispute resolution (ADR) proceedings. Such proceedings are qualitatively different from court proceedings and in many respects require different skills. Members of the Accounting Law Group have had extensive experience with both arbitration and mediation of accountants’ liability claims. Indeed, one of the members of the Group served on the American Arbitration Association’s Accounting Firm Advisory Group and was one of the co-authors of the AAA’s Dispute Resolution Rules for Professional Accounting and Related Services Disputes.
The vast majority of cases brought against accounting firms are covered by professional liability insurance. Accordingly, it is important for accounting firms to be defended by a law firm familiar with the litigation guidelines of malpractice insurers and accustomed to working with their claims departments. It is also important to understand the attorney’s respective responsibilities to the client and its insurer and the extent to which the courts will recognize and attorney-client privilege with respect to communications between the attorney and the client’s insurer. The Vedder Price Accounting Law Group has worked with virtually every insurer that has offered professional liability insurance to accounting firms and currently serves as a member of the defense panels of the three principal insurers of small and mid-size U.S. accounting firms.
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