Crowe Horwath is one of the largest accounting firms in the United States. Boasting 3000 employees and a nationwide network, the company has grown quickly from its start less than 70 years ago. Today, the firm is gearing up to face a massive accounting malpractice claim filed by a former client. A trial court judge initially tossed the suit but on March 8th, the Court of Appeals of Indiana reinstated the claims.
Factual Background
Magic Circle Corporation went by the name Dixie Chopper. After the economic downturn in 2008, Dixie Chopper was having financial difficulties. Like many companies at the time, it struggled to keep its doors open. The company hired two turnaround experts at the close of 2008, Simon Wilson and Gary Morgan. At that same time, it also hired Crowe Horwath to perform auditing services.
Today Dixie Chopper is part of a much larger industrial conglomerate, Jacobsen / Textron. Until 2014, it remained independently owned and operated. The company is best known for making the world’s fastest lawn mowers. To this day, the company has a hardcore group of followers. Even Willie Robertson from Duck Dynasty is rumored to drive a Dixie Chopper.
According to the lawsuit filed, Wilson and Morgan mismanaged the company. They left in 2011, although Crowe Horwath stayed on as auditors until 2013.
Accounting Malpractice Claims against Crowe Horwath
The shareholder’s lawsuit claims that Wilson and Morgan’s mismanagement went on for years without being discovered. Although both men were named in the suit, the shareholders believe the deep pocket in the case is Crowe Horwath. They claim that the audit firm should have discovered the problems much earlier. They say the problems weren’t made known until 2013 when Crowe Horwath discovered a $14 million loss.
The shareholders say that by the time the loss and mismanagement was discovered in 2013, the company had fallen into dire financial straits. They claim that is why the company is today owned by Jacobsen Textron.
Many of the lawsuit claims were dismissed. These dismissed claims include those against Wilson and Morgan. There were still claims pending against Crowe Horwath, however.
In January of 2016, The accounting firm asked the trial court to dismiss the remaining claims. Those claims say that Crowe Horwath aided and abetted fraud and committed accounting malpractice.
The trial court agreed with the accounting firm and dismissed the remaining claims in June of last year. That set up the case for an appeal by Magic Circle, the former corporate owner of Dixie Choppers.
“Economic Loss Doctrine” and It’s Importance to Accounting Malpractice Victims
The legal issues on appeal were quite complex and arcane but of critical importance to victims of accounting malpractice. The law in many states is that purely economic losses should be handled by commercial law. (This is also known as the law of contracts.) Property damage and personal injury claims are handled as tort law.
If you are hurt in an automobile accident, you file a tort claim against the driver responsible for your injuries. If a company fails to honor a warranty, you file a breach of contract claim. This legal concept is called the Economic Loss Rule.
Sometimes the lines get blurry between the two. In many states, for example, legal malpractice claims are handled as if they are torts.
Leaving aside the legal jargon, injured parties generally have better outcomes under tort law. Why? Because damages are unlimited.
Magic Circle doesn’t want the money it paid for accounting services refunded. It wants damages for the loss of their company. (Reminder that this case is in its early stages. The company must still prove that Crowe Horwath committed accounting malpractice AND must prove that any malpractice resulted in the loss of their company. Two big hurdles! More on that below.)
The Indiana Supreme Court long recognized the economic loss rule but said it wasn’t absolute. Legal malpractice claims in Indiana, for example, can be prosecuted as tort claims. Unfortunately, no appeals court in the state had ever ruled on whether accounting malpractice was also an exception to the economic loss rule.
Appeals Court Rules against Accounting Firm
After a hearing, a three judge panel of the Court of Appeals ruled that accounting malpractice could be brought as a tort action. That is good news in general for victims of accounting malpractice in Indiana. The ruling doesn’t address whether Crowe Horwath has done anything wrong. That will be up to a jury.
Case in Early Stages – Crowe Horwath Far from Guilty
The appeals court ruled on a Motion to Dismiss. This was a preliminary move by Crowe Horwath to dismiss the case on legal grounds. That the court ruled against the accounting firm does not mean the case is over. Magic Circle still must prove its case. That won’t occur until after discovery and after the case reaches a jury.
Much of the case will now focus on the duties of the auditors, how they performed their duties and the obligations of the company to provide accurate information to the auditors.
The contract (called an engagement letter) between Crowe Horwath and Dixie Choppers required the company to make full disclosures to the auditors. How can an accounting firm conduct a full audit without all the client’s books and records? This will likely remain a key focal point as the case proceeds.
Proving Accounting Malpractice
Accounting malpractice claims come in many different forms. Sometimes clients accuse their accountant of giving bad tax planning advice. Sometimes the client says the accountant made a mistake on a tax return leading to additional tax, interest and penalties. In this case, the client claims that its accountant botched an audit.
Some of the largest malpractice claims involve audits. (As this post is being written, the audit malpractice trial against PricewaterhouseCoopers in the MF Global debacle is just getting under way.)
The proof requirements in each of the cases is different. All three types of accounting malpractice cases have a common thread, however. They all require that the victim prove that the accounting firm deviated from a standard of care.
MahanyLaw – Fraud Recovery and Legal / Accounting Malpractice Lawyers
In many of our fraud recovery cases, we see that bad lawyering or accounting services contributed or caused our client’s losses. Few lawyers are willing to bring cases other lawyers and few have the experience to sue accountants. Often, we are astonished to see personal injury lawyers offering malpractice as a side practice area.
If you have lost $1 million or more because of a bad accountant, give us a call. We may be help or find you someone who can. To date, we have handled cases in over 30 states.
For more information, please contact attorney Brian Mahany at *protected email* or by phone at 414-704-6731 (direct). All inquiries protected by the attorney – client privilege and kept confidential.
[Note. In full disclosure, MahanyLaw receives accounting services from a Crowe Horwath affiliate. The preliminary order allowing the Dixie Chopper case to proceed is one based on legal grounds and not factual grounds. It has not impacted our decision to remain with our accounting firm. No consideration was provided for the content or subject matter of this post. We report things as we see them and never accept paid posts.]
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