CPA firm is hired to do taxes for a medical corporation.  Medical corporation’s bookkeeper is stealing large amounts of money, and is eventually discovered.  Was the CPA firm, which was not hired to investigate, nor to monitor the bookkeeper potentially liable?

JAG Orthopedics, P.C. v AJC Advisory Corp.  2015 NY Slip Op 51111(U)  Decided on July 21, 2015  Supreme Court, Kings County  Demarest, J. says, yes, it can be liable.

“Plaintiff’s claims against defendants arise out its allegations that defendant Lydia Vecchio Ferrante, plaintiff’s officer manager from September 2009 to June 2014, misappropriated/embezzled hundreds of thousands of dollars from plaintiff by: (1) writing checks to herself well in excess of her monthly salary of $4,000; (2) obtaining, without authorization from plaintiff, a debit/credit card tied to plaintiff’s checking account and charging items for her own personal use; (3) forging the signature of plaintiff’s owner and president, Andrew Miller, M.D., on checks made out in her name, and (4) misappropriating funds from a checking account that plaintiff had closed prior to the misappropriation. Santander’s liability is premised on its alleged failure to close a checking account in plaintiff’s name from which Ferrante appropriated funds and also its processing checks forged by Ferrante made out to Ferrante. The AJC Defendants’ liability is primarily premised on their [*3]failure to inform plaintiff of Ferrante’s misappropriation of plaintiff’s assets that was evident from financial records submitted to the AJC Defendants for them to prepare plaintiff’s taxes.

According to the second amended complaint, plaintiff, a provider of orthopedic services, hired Lydia Ferrante in September 2009, and in her role as office manager, she was, among other things, in charge of billing, payment of office bills, and receiving and reconciling bank statements (Second Amended Complaint at ¶¶ 12-13). In order to carry out these duties, plaintiff made Ferrante [FN2] an authorized signatory on its checking account (the 4933 account) with Santander (Second Amended Complaint at ¶ 15). In August 2013, Dr. Miller went to a Santander branch and requested that it close the 4933 account and that it transfer the funds in that account to a new account for plaintiff (the 0089 account) opened by Dr. Miller (Second Amended Complaint at ¶¶ 18-19, 29). Although plaintiff gave Ferrante a check book relating to the new 0089 account, Ferrante was not given any authority to write checks on that account, which authority was only maintained by Dr. Miller (Second Amended Complaint at ¶ 20).”

“Initially, the court addresses the portion of the AJC Defendants’ motion seeking [*5]dismissal of plaintiff’s malpractice claim against them. “A claim of professional negligence requires proof that there was a departure from the accepted standards of practice and that the departure was a proximate cause of the injury” (Bruno v Trus Joist a Weyerhaeuser Bus., 87 AD3d 670, 672 [2d Dept 2011]; see also Schwartz v Leaf, Salzman, Manganelli, Pfiel & Tendler, LLP, 123 AD3d 901, 902 [2d Dept 2014]; Kristina Denise Enters., Inc. v Arnold, 41 AD3d 788, 788 [2d Dept 2007]). The AJC 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 a financial review,[FN4] 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 (see 1136 Tenants’ Corp. v Rothenberg & Co. (36 AD2d 804 [1st Dept 1971], affd 30 NY2d 585 [1972]) (“even if defendant were hired to perform only write-up’ services, it is clear, beyond dispute, that it did become aware that material invoices purportedly paid by Riker were missing, and, accordingly, had a duty to at least inform plaintiff of this. But even this it failed to do. Defendant was not free to consider these and other suspicious circumstances as being of no significance and prepare its financial reports as if same did not exist”); see also Collins v Esserman & Pelter, 256 AD2d 754, 756-757 [3d Dept 1998]; Board of Trustees of IBEW Local 43 Elec. Contrs. Health & Welfare, Annuity & Pension Funds v D’Arcangelo & Co., LLP, 124 AD3d 1358, 1359 [4th Dept 2015]; Hall & Co. v Steiner & Mondore, 147 AD2d 225, 228 [3d Dept 1989]).

The AJC Defendants argument that they may not be held liable for malpractice because plaintiff made Ferrante its agent in dealing with the AJC Defendants is improperly raised for the first time in reply (see U.S. Bank N.A. v Sarmiento, 121 AD3d 187, 208 [2d Dept 2014]; Congel v Malfitano, 61 AD3d 809, 810 [2d Dept 2009]). Even if this argument could be seen as a response to arguments raised by plaintiff in its opposition papers, plaintiff’s giving Ferrante the responsibility for “interacting” with AJC on plaintiff’s behalf (Second Amended Complaint at ¶ 13) does not, in itself, vitiate AJC’s duty to plaintiff, as in performing the tax preparation services on plaintiff’s behalf, Ferrante’s improper conduct was undoubtedly recognizable as adverse to plaintiff’s interests (see Schwartz, 123 AD3d at 902-903; Capital Wireless Corp. v Deloitte & Touche, 216 AD2d 663, 666 [3d Dept 1995]; see also Collision Plan Unlimited, Inc. v Bankers Trust Co., 63 NY2d 827, 830 [1984]; 1136 [*6]Tenants’ Corp., 36 AD2d at 804-805; 2A NY Jur 2d, Agency and Independent Contractors § 103). Similarly, while it appears that plaintiff’s own negligence in monitoring Ferrante enabled Ferrante to continue her scheme for several years, the pleadings do not show it to be the sole proximate cause of the loss since such negligence does not appear to have impeded the AJC Defendants performance of their duties in reviewing plaintiff’s tax materials (see Collins, 256 AD2d at 757).

Accordingly, plaintiff’s allegations sufficiently plead a departure from accepted accounting practices. In addition, this alleged failure to inform plaintiff of the improprieties apparent from the financial record certainly could be seen as a proximate cause of damages suffered in that plaintiff, if it had earlier knowledge of Ferrante’s misdeeds, may have been able to prevent some of her misconduct (see Collins, 256 AD2d at 756-758; see also Kocak v Egert, 280 AD2d 335, 336 [1st Dept 2001]; CAE Indus. v KPMG Peat Marwick, 193 AD2d 470, 473 [1st Dept 1993]; cf. Leigh Mgt. Assoc. v Weinstein, 251 AD2d 225, 226 [1st Dept 1998]).”