March/April 2011

The Accountant/Attorney Liability Reporter

Inside this issue:

Fair Value Opinion Engagements
By John B. Connarton, Jr. P.C.

Whether the issue is preparing financial statements or raising capital, accurate valuations which are credible and well substantiated, are a necessity. Credible asset valuations accelerate and drive informed decisions in all market conditions. Referring to prevailing market prices to determine an asset’s value might work for some assets, while not for others where a market is illiquid. Difficulties also arise since depressed market values don’t necessarily reflect the intrinsic value of the company’s assets. Companies need accurate valuations to ensure the financial statement numbers are defensible. Raising capital needs support for future cash flow projections. Negotiating lending terms needs verification of financial ratios.

Auditor's Obligation to Third Parties
By Nathanial Paty and Cheryl Waterhouse

The contours of auditor liability was recently solidified by the Texas Supreme Court case of Grant Thornton LLP v. Prospect High Income Fund, which reaffirmed that accountants can only be held liable for negligently supplying information used by third parties if the information is supplied “to a known party for a known purpose.”  A “known party” must be a member of the “limited class” that an accountant directly supplies information to, and the accountant must intend that the known third party rely on the information.  The standard for fraud liability is even higher: an accountant must have “intent to deceive” the recipient of the information.  For both negligent misrepresentation and fraud, the recipient must “show actual and justifiable reliance” on the information in order to make a successful claim.

Accountant Compensation Dispute Governed By State Law When Not Specified in Agreement
By Justin M. Jagher

An agreement between an accounting firm and its partner can be used against a firm when the provisions are not clearly defined.  A Florida Court of Appeals determined that, in an accountant compensation dispute, the state’s attorney fee statute governing “unpaid wages” applied where the agreement was silent on that issue.

Auditor Obtains Dismissal of Claims by Shareholder Where Assets Invested with Bernie Madoff
By Daniel C. Poteet

A recent case is indicative of some of the procedural defenses that may be available to auditors with respect to claims brought by Madoff victims.  It also demonstrates reluctance on the part of a court to allow a plaintiff to, in essence, repackage a negligence or malpractice-based claim into a viable count for fraud.

Protecting Your Business Interests: Non-Competition and Other Restrictive Covenants
By Chris Whitten and Cheryl A. Waterhouse

Accounting firms, like other professional firms, often enter into agreements with principals, or key employees, which contain restrictive covenants.  Non-competition, non-solicitation and non-disclosure provisions are examples of agreements designed to protect a firm’s business interests and its investment in personnel, customer relations and confidential business information.  These agreements are only good if they can be enforced, however.  In most cases, such covenants may be upheld if the covenants meet certain standards such as 1) they are reasonable in balancing the employer’s interests and the employee’s interest in employment, 2) they are supported by considerations, 3) they do not violate public policy by being in restraint of trade, 4) they protect legitimate business interests and 5) they are reasonable in duration and geographical limits.  There are some states which limit the enforceability of restrictive covenants, however, while others, such as California, generally do not enforce non-competition agreements.

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