Action May Be Brought Against Accountants For Failing To Disclose Client’s Employee's Financial Wrongdoing

On July 21, 2015, Justice Demarest of the Kings County Commercial Division issued a decision in JAG Orthopedics, P.C. v. AJC Advisory Corp., 2015 NY Slip Op. 51111(U), denying most of defendants’ motion to dismiss.

In this action, plaintiff's doctor-principal discovered that his office manager had embezzled money by misusing a company credit card and company checks she had obtained without his knowledge. The company brought an action against, inter alia, the accounting firm, its principal, and two accountants alleging that they had failed to inform the plaintiff of the employee’s wrongdoing. The defendants moved to dismiss.

Justice Demarest denied the motion to dismiss the malpractice claim against the accounting firm:

Defendants' primary contention regarding the malpractice claim is that they were simply hired to prepare plaintiff's income taxes, not to audit plaintiff's books or to act as bookkeepers, and as such, had no duty to discover or report Ferrante's misappropriations. Plaintiff's claim, however, is not that the AJC Defendants were hired to discover or ferret out Ferrante's wrongdoing through an audit or financial review, but rather, that information in plaintiff's ledgers and the financial information used by the AJC Defendants in order to prepare the tax returns raised questions about the propriety of Ferrante's payments to herself such that they had a duty to inform plaintiff of the questionable practices. Based upon the affidavit of Gary Hoffman, a licensed tax preparer and tax accountant, describing the standards applicable to tax preparers such as defendants, these allegations sufficiently plead a departure from accepted accounting practices.

Although the plaintiff's own negligence in supervising Ferrante may have contributed to the loss, "the pleadings do not show it to be the sole proximate cause of the loss."

The defendants also moved to dismiss the claims against the individuals, on the grounds that the complaint only described them as the owner and two employees of the firm without stating any basis for personal liability. However, in opposition plaintiff submitted tax returns showing that the two employees had prepared them, and this was "a sufficient basis to infer their involvement in the alleged malpractice." On the other hand, no additional allegations were made against the owner, so the case against him personally was dismissed.

The court also held that, under the circumstances, plaintiffs had alleged a claim for breach of fiduciary duty, but this claim was dismissed anyway as duplicative of the malpractice claim.

This opinion shows how professional obligations can extend beyond the contracted-for services. It also shows how not just additional allegations, but also documentary evidence and even expert affidavits can be used in opposition to a motion to dismiss to supplement the allegations in the complaint.