On December 13, 2006, the Indiana Court of Appeals reviewed the statute of limitations applicable to claims of accountant malpractice. In so doing, it also considered whether the accountant’s “continuing representation” after the client’s financial harm became known should postpone commencement of the limitations period for a claim against the accountant.
In this case the court upheld summary judgment in favor of the accounting firm, but it held that in some situations an accountant’s representation of the client in attempting to adjust or resolve the harm will postpone commencement of the limitations period.
The facts were that the plaintiff roofing contractor was a longtime client of the defendant accounting firm. The representation included compilation of annual financial statements, preparation of tax returns, and assistance to and training of the client’s in-house accounting manager. In March 2003 the client discovered its accounting manager had been embezzling company funds. In July 2004 the client sued the firm alleging its negligence contributed to the loss. The trial court entered summary judgment for the accounting firm on the grounds the suit was not timely filed.
The first question on appeal was: Is this claim is governed by the Indiana Accountancy Act’s, Ind. Code § 25-2.1-15-1, one-year statute of limitations for certain claims against accountants or by the more generous two-year limitations period applicable to an accountant’s breach of other legal duties? Consistent with earlier authority, the court decided the services rendered by this firm were within the Act’s “practice of accountancy” and thereby governed by the one-year period.
The next question was: When did the cause of action accrue and the limitations period commence, i.e., when the client discovered the embezzlement or when the client knew or should have known the accountant’s negligence contributed to the loss? Consistent with Indiana law, the court held that the limitations period commences when the client had knowledge of pertinent facts which put it on notice a basis for a claim might exist against the accountants. In this case that occurred with the discovery of the employee’s embezzlement.
Lastly, the Court addressed whether the accountant’s continued representation of the client after discovery of the embezzlement should postpone commencement of the limitations period. Here, the firm continued to provide professional services to the client as the matter was investigated. In resolving this question of first impression, the court analogized claims against accountants to claims against attorneys. In Indiana, when an attorney continues to represent the client in attempting to resolve or lessen the harm arising from the basis for claim, such “continuing representation” will postpone commencement of the limitations period until the representation ends on that particular matter. Public policy encourages the client to allow the attorney to attempt to lessen or eliminate the client’s harm from the alleged malpractice.
Consistent with the law of other jurisdictions, the Court of Appeals held this rule should also apply to claims of accountant malpractice. However, the continuing representation here was of a general nature and did not involve efforts to resolve or lessen the basis for a claim against the accountants. Hence, no policy reason existed for the client to refrain from bringing suit.
The thrust of this decision is that most suits against accountants for professional negligence must be initiated within one-year of when the client knew or should have known it suffered harm and had a basis for a claim. Claims of fraud or breach of fiduciary duties can extend the limitations period for an additional year. If the accountant assists the client in attempting to appeal or otherwise adjust the specific matter that gives rise to the claim, the limitations period is tolled while the accountant represents the client in those efforts.
The decision may be found on-line at the Indiana Supreme Court website – http://www.ai.org/judiciary/opinions/archapp.html as No. 43A03-0605-CV-213.
Kent Frandsen is a partner in the law firm of Parr Richey Frandsen Patterson Kruse LLP with offices in Lebanon and Indianapolis. He serves as general counsel to the Indiana CPA Society and often represents businesses in seeking tax abatement on new investments.
December 2006
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.