By Stuart Kahan

The Practical Accountant, April 1998, Vol. 31, No. 4, p. 52

Eric Engel, attorney in the Santa Monica , California law firm of Conkle, Kremer & Engel, recounts this experience:

“We defended an accountant firm against claims by a group of doctors, for whom the firm had provided accountant services. The accountants also recommended to the doctors investments that were being offered by other clients of the accountants. The investments were fractionalized interests in second trust deeds on residential properties. The accountants received a commission from the sale of the interests. The real estate market turned sour, and the investments became worthless. The doctors then sued the accountants.

“This circumstance involved several problems for the accountants, including (1) conflicts of interest, for recommending investments offered by one client to other clients, and for nondisclosure of all of the accountants’ interests in the investment; (2) various forms of negligence, breach of fiduciary duties, and fraud; and (3) state and federal securities law violations, because fractionalized trust deeds were likely to be considered securities requiring registration and disclosure.

Unpublished Post-Script by Conkle, Kremer & Engel:

Although the facts were pretty bleak, the accountants had one advantage: Errors & Omissions insurance coverage. Although some of the claims asserted by the doctors were not within the coverage of the insurance policy, other claims were. Under this circumstance, the accountants were entitled to have their attorneys’ fees paid by the insurer, and the insurer contributed a substantial amount of money to a settlement. The out of pocket cost to the accountants was limited to their insurance deductible. The case highlights both some of the risks of recommendation of investments to clients, and the value of insurance to accountants and other professionals

If you are interested in accountant malpractice issues, we suggest that you consider the decision of the California Supreme Court in the lawsuit called Jordache Enterprises v. Brobeck, Phleger & Harrison. That lawsuit is a legal malpractice action, and concerns when the statute of limitation starts to run on malpractice claims. Historically, the Supreme Court has treated statute of limitations issues in accountant malpractice actions in the same way as attorney malpractice claims. ( See , for example, International Engine Parts v. Feddersen , 9 Cal. 4th 606 (1995)). The result in Jordache v. Brobeck may well affect rules concerning how long a client can wait before suing his accountant for malpractice.

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