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Pennsylvania Accounting Malpractice – Accountant Botches Audit

Pennsylvania Accounting Malpractice – Accountant Botches Audit

Louis Arnold is a Philadelphia personal injury lawyer. Like many small professional practices, Arnold concentrated on helping clients and left the finances to a bookkeeper.

For years, Arnold relied on a bookkeeper to pay taxes, collect money, and make sure the bills were paid. Way back in 2003, Arnold hired a CPA, Stephen Comer, to prepare his taxes. Like Louis Arnold, Mr. Comer operated a small professional practice.

Along the way, Comer’s accounting practice grew and he began hiring assistants to help with the work.

In 2007, Arnold discovered that his bookkeeper had not been paying payroll taxes. Suddenly the firm was faced with a tax bill of several hundred thousand dollars. Arnold did what most of us would do. He fired the old bookkeeper, hired a new one and this time asked Comer’s accounting firm to watch over the new bookkeeper. In the words of Louis Arnold, he asked the accounting firm “to manage all aspects of the Firm’s finances”

If you read this far, you probably know what happens next. The new bookkeeper was actually worse than the old one. Whereas Arnold’s first bookkeeper simply didn’t file taxes, the new bookkeeper stole money. Lots of money and apparently right under the watchful eyes of the accounting firm.

Arnold’s accounting malpractice lawsuit says that “between 2009 and 2015, without [his] knowledge or consent, [the new bookkeeper] embezzled, defalcated, and misappropriated at least $606,701.83 from the Firm through checks and cash withdrawals on the Republic Accounts and the TD Bank accounts, as well as fraudulent charges on the Firm’s credit/credit cards.

The second fraud forced Louis to cash in his retirement and pension funds, beg friends for money and borrow money at extremely high interest rates just so he could keep his doors open. In November of 2017, Louis Arnold filed an accounting malpractice lawsuit against Stephen Comer, the assistant who worked Mr. Arnold’s account and the accounting firm.

Accounting Malpractice Lawsuit and Punitive Damages

Louis Arnold’s accounting malpractice suit claims that the accountants failed to detect the embezzlement, failed to keep the law firm’s books in proper order and failed to tell the firm that hundreds of thousands of dollars was missing from the firm’s accounts.

Specifically, the lawsuit outlines a number of alleged failings by the accountants including:

a.     Failing to properly advise Plaintiffs;

b. Failing to undertake an actual determination of the cash position of Plaintiffs to

be sure that the accounting records showed the true financial position of Plaintiffs;

c. Failing to utilize reasonable and proper accounting methods and procedures

which made the embezzlement possible;

d. Failing to detect the embezzlement;

e. Failing to properly keep Plaintiffs financial books and statements in order;

f. Failing to utilize the skill and knowledge possessed by reasonably prudent

accountants in determining embezzlement of money by Plaintiffs’ employee;

g. Failing to implement systems to prevent or detect thefts;

h. Failing to advise Plaintiffs to secure a fidelity bond for any employee with access

to cash to cash and operating accounts;

i. Failing to comply with AICPA standards;

j. Failing to advise Plaintiffs of the deficiencies in their operating procedures which

enhanced the opportunity for theft;

k. Failing to properly review the Firm’s financial records;

l. Failing to properly advise Plaintiffs of various tax issues;

m. Failing to timely communicate with Plaintiffs;

n. Breaching the duty of loyalty to Plaintiffs;

o. Breaching their fiduciary duties to Plaintiffs;

p. Failing to properly represent Plaintiffs;

q. Failing to request, examine or review the statements for the business operating

account at Republic Bank;

r. Failing to make necessary inquiries in accordance with reasonable professional

standards so as to discover what was readily discoverable in order to protect

Plaintiffs;

s. Ignoring suspicious circumstances which should have raised a “red flag” for a

reasonably skilled and knowledgeable accountant;

t. Allowing the bookkeeper/paralegal to continue the responsibility of

bookkeeping with receipt of payments in the hands of a single employee without

supervision or any control mechanisms by Defendants;

u. Failing to properly advise Plaintiffs of the misappropriation and other financial

and accounting problems; and

v. Failing to exercise the degree of skill and professional care in performance of

their services as reasonably prudent, skillful accountants would under the

circumstances.

Louis also brought a claim for breach of fiduciary duty, a claim that under Pennsylvania law allows a victim to potentially recover punitive damages.

Ordinarily, accountants do not owe a fiduciary duty to their clients. Simply preparing tax returns doesn’t trigger a fiduciary duty in most states but if they managed all aspects of the law firm’s finances as claimed in the complaint, they may just be liable for punitive damages.

Immediately after the lawsuit was filed, Comer and the accounting firm attempted to have the court toss the punitive damage claims. They claim that at most their conduct was negligent and that there is no evidence to show that their work was so “outrageous” or “reckless” as to allow a claim for punitive damages.

In a one page order in February 2018, the court denied Cpmer's motion to dismiss. That means that Louis Arnold’s claims – including claims for punitive damages – can advance.

Awards of punitive damages are extremely rare in accounting malpractice cases. This is especially true when the main thrust of the complaint is that the accountants missed an employee theft or embezzlement. By having a punitive damages claim in the case, however, it often becomes much easier to resolve the case.

In the typical malpractice claim, the accounting firm’s malpractice insurer knows the maximum damages they face. In this case, that would be the $600,000 that was taken, the cost of forensic accountants needed to determine the losses, any IRS penalties and interest caused by late returns or payments and the interest costs associated with borrowing money. Throw punitive damages into the mix, however, and suddenly the insurance company is facing a big unknown. No one knows how much a jury may award as punitive damages are meant to punish the wrongdoer to make sure similar conduct doesn’t happen again.

Can I Sue My Accountant?

“Can I sue my accountant” is a question we frequently hear. Like all professionals, accountants make mistakes. Sometimes their mistakes are really bad and sometimes they aren’t mistakes, instead they are deliberate fraud. In all these scenarios, an accountant can be held responsible for any damages caused by his or her fault.

As seen in this case, accounting firms can also be held responsible for the mistakes of their employees and agents. In this case, the actual accountant who oversaw Louis Arnold’s account was sued as well as the owner of the firm and the firm itself.

Successfully getting justice for clients often means knowing who to sue. Obviously ,the new bookkeeper who stole the $600,000 is responsible but in most cases, the stolen money is long gone. Suing someone who will likely be spending years in prison isn’t going to recover much. Even restitution orders from courts aren’t helpful, who is going to hire a convicted thief?

When we take fraud loss cases we look to the accountants, auditors, lawyers and other professionals who may have been asleep at the switch. Although an accountant who simply prepares taxes is probably not responsible for catching an employee theft, they can be responsible if they were hired to oversee or audit a company’s finances.

To learn more about accounting malpractice claims, visit or Accounting Malpractice information page. If you have specific questions or want to know if you have a case, contact us online or by phone at 877-858-8018. All inquiries are protected by the attorney – client privilege and kept strictly confidential.

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