News & Insights

Auditor Liability Bulletin

April 5, 2024

Court Allows Claims Against Accounting Firm to Proceed in Case Alleging Officer’s Improper Activities

On April 4, 2024, the Appellate Division of the Supreme Court of New York reinstated plaintiffs’ accounting malpractice and aiding-and-abetting-fraud claims against Getzel, Schiff & Pesce, LLP.  The plaintiffs, the majority owners of the Stardust Diner, alleged that a minority owner, the founders’ son who had assumed day-to-day responsibility for the business, looted the business by taking unauthorized loans and obtaining an unauthorized line of credit by forging a majority owner’s signature.  Accounting firm Getzel Schiff had been engaged to provide non-audit financial-statement compilation and tax filing services and in the course of that work, according to plaintiffs, discovered but failed to disclose the fraud.

The trial court dismissed the plaintiffs’ claims against Getzel Schiff on the ground that the accounting firm’s duties—compiling financial statements and tax returns—did not include investigating and reporting on fraud.  The appellate court reversed this decision, holding that “an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent.” The court also rejected the firm’s argument that the plaintiffs’ own negligence—their failure to properly review the financial statements that included the fraudulent loans—precluded their claims because, at the pleading stage, the firm did not show “that such negligence was the sole proximate cause of the Diner’s loss.”

The case is 1650 Broadway Associates, Inc. v. Sturm, No. 2023-02815 (N.Y. App. Div.).  The plaintiffs are represented by Nagel Rice LLP.  The defendant is represented by Fox Rothschild LLP.  A copy of the order can be found here.