Justices Rule that Accounting Malpractice Victim Failed to Prove Causation
In most states there are five essential elements of an accounting malpractice (professional negligence) claim. To be successful in your case against an accountant, you must prove:
- The accountant – client relationship. (Note this post doesn’t discuss situations when investors or other third parties attempt to bring actions based upon reliance of a faulty audit report.)
- You must show the accountant owed you a duty. Generally, unless the accountant’s engagement letter says something to the contrary, the duty owed you is one of reasonable care. Accountants, like lawyers and doctors, can’t guarantee results but they always must use reasonable care.
- Breach of Duty. Once you establish that the accountant owed you a duty, you must next show that he or she deviated from the duty. That usually means you must show that the accountant failed to exercise the skill and learning normally possessed and used by other accountants in a similar practice and under like circumstances.
- You must also show that you suffered a loss or some sort of harm. Let’s say the IRS assesses you a penalty for late filing a return. If the accounting firm appeals and fixes that penalty then you are no longer suffering any harm meaning you have no damages. A mistake without damages or harm means you have no case.
- CAUSATION. This is the final element of an accounting malpractice case and one that is often overlooked. Causation looks to determine whether the accountant’s wrongful act caused the damages. (In some jurisdictions, causation is called “proximate cause.”)
This post examines causation and how it can make or break a successful accounting malpractice case.
The Law Dictionary defines causation as “Whether an act or omission was responsible for something occurring or not occurring. The relationship of cause and effect of something happening or not happening.” In layman's terms, it means you must connect the harm suffered with the accountant's wrongful act.
To better understand this concept, we will discuss a recent Rhode Island Supreme Court case that tossed a $5.7 million award against an accounting firm for failing to prove causation.
The Rhode Island Resource Recovery Corporation is a quasi governmental agency. It charges fees for its services but was set up by the state legislature as a recycler and waste management agency.
In 2007, Michael O’Connell took over as executive director. He found the agency rife with inefficiency and conflicts of interest. He also suspected illegal and improper behavior that cost taxpayers millions.
O’Connell says he alerted the governor’s office. A full forensic audit found that O’Connell’s suspicions were correct. The Providence Journal reported that the audit found, “Employees, vendors and commissioners appeared to have compromised their ethical obligations and their loyalty to the agency and public.”
The audit revealed tens of millions of dollars in waste. O’Connell said of the old management, “They were mismanaging the company. They were misusing money. They were pushing business to the companies they wanted to get the business.”
The governor said the state’s dump had been operated by the old leadership “as their personal playground.”
Total cost to taxpayers? An estimated $75 million during the 8 year audit period.
State police detectives were stonewalled by a lack of cooperation and hampered by expired statutes of limitations. In other words, no one went to jail despite pilfering millions from resident’s pockets. That didn't stop the state from still trying to recover some of the lost money.
Accounting Malpractice Charges Against Restivo Monacelli
Restivo Monacelli is a Rhode Island based accounting firm. According to their website, they have the experience and skills necessary to “protect their client’s wealth and assets.” When they were a still relatively new firm, they landed the Rhode Island Resource Recovery Corporation as a client. Like many government agencies, the state’s dump operator was audited annually.
O’Connell and the new board at the company elected to sue all the accounting firms that had previously audited the agency. Two of the more recent audits were performed by Restivo Monacelli. (The other accounting firms settled.) The agency claimed that if the accountants had done their job properly, much of the corruption would have come to light and millions of tax dollars saved.
In O’Connell’s words, “[Restivo was] a professional accounting and auditing firm who in the course of two years found no issues with Resource Recovery. I came in in six months and I was tripping over issues, I couldn’t help it, they were everywhere. And they found nothing.”
For their part, Restivo Monacelli claimed the real wrongdoers were the corrupt commissioners and employees. They claimed they didn’t breach their duty to the Corporation.
In 2015 a state jury decided otherwise. With interest, the Rhode Island Resource Recovery Corporation was awarded almost $6 million dollars against Restivo for accounting malpractice.
Restivo Monacelli appealed the verdict.
Yesterday the Rhode Island Supreme Court reversed the verdict. They found that the agency failed to show how any malpractice by the accountants caused their damages. In other words, no causation.
The Supreme Court noted that the agency did present expert testimony on accounting malpractice. Their expert testified that, “Restivo ‘lacked the experience to perform an audit of a quasi-governmental entity.’ He further testified that Restivo ‘failed to test compliance with the applicable laws, regulations, contracts, and other agreements,’ ‘failed to identify and report the improper charitable contributions,” and “failed to report internal control deficiencies that were identified.’”
Another expert was called to testify about damages.
The testimony of the two experts may have been enough to convince a jury that Restivo Monacelli was negligent in its audit. But the Supreme Court said it wasn’t enough to show causation.
The Supreme Court didn’t toss the verdict because the accountants weren’t negligent. Instead, they limited their decision to the causation issue. Because accounting malpractice is a technical field, they say that an expert should have been called to connect the negligence or malpractice with the damages. In other words, the agency failed to properly connect the dots.
In the words of the court, “In this case, we are confronted with alleged accounting malpractice as opposed to medical or legal malpractice; but accounting is a comparably specialized field, requiring specific training and skills. It is clear that understanding how a negligent audit caused, or allowed to persist, damages such as those stemming from inappropriate charitable contributions and a change in the amount potentially gleaned from trust investments requires knowledge far beyond the ken of an ordinary lay person. It requires both an understanding of the auditing process as well as an understanding of what would likely have occurred had the problems concerning Resource Recovery’s finances been brought to light sooner than they eventually were.”
Because other parties were also negligent, an expert was necessary to show whose negligence was responsible for what damages.
The Chief Justice filed a separate opinion saying that some of the damages were obvious enough that no expert was needed to prove causation.
Restivo Monacelli’s lawyers are already claiming victory. (The decision was handed down on July 3rd. As of this this afternoon the accounting firm’s website remains silent. Only the lawyers are apparently speaking.)
The decision is a victory for them but certainly not a vindication. The Supreme Court did not reverse the jury’s findings that the accounting firm botched the audit. Instead, the court said that the agency simply didn’t connect the dots between the accountant’s failures and the damages suffered by the agency.
My Accountant Botched an Audit, What Now?
We are constantly asked, “Can I sue my accountant?” Accounting malpractice can occur when an accountant gives poor advice, botches a tax filing or misses obvious fraud during an audit. No one claims that Restivo Monacelli should have picked up on dump employees leaving work early or abusing their hours. The experts said, however, that an accounting firm auditing a government agency should have been able to determine that $1000 checks for golf outings or million dollar donations to charities were inappropriate.
If your accountants botched an audit or gave you bad advice, give us a call. Very few lawyers handle accounting malpractice cases. Lawyers who claim to sue for professional negligence are often more interested in general commercial litigation or medical malpractice cases.
We are different.
Think you have a case? Read our accounting malpractice information page. Then contact us online or by phone 877-858-8018.
The time period in which to sue an accountant for misconduct or malpractice is often quite limited. Don’t delay. Call us today for a confidential, no fee consultation. All inquiries are protected by the attorney – client privilege and kept strictly confidential.
We take cases nationwide. To date we have handled cases in 40 states. Depending on the location of the claim, services are either performed by us or by us with one of our local partners. Our minimum loss figure is generally $1 million.