Francine McKenna was the first to opine (strongly we might add) on the ruling in Kirschner v. KPMG (along with the derivative suit Teachers’ Retirement System of Louisiana and City of New Orleans Employees’ Retirement System v. PricewaterhouseCoopers) that was announced yesterday.
The New York Law Journal reported on the ruling first:
Ruling on certified questi irschner v. KPMG LLP, 151, and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP, 152—a 4-3 majority held that accountants who allegedly should have detected malfeasance by executives of Refco in Kirschner and American International Group Inc. in Teachers Retirement System cannot be sued under state law.
The Court held that the principles under which the suits were dismissed—in pari delicto and imputation—are “embedded in New York law” and “remain sound.”
Like we said, Francine had some thoughts on this and she did not hold back:
A majority of the New York Court of Appeals bought the self-serving, selfish and unjust arguments of the defendants and their flunky amicus brief toadies supporting criminal corporate fraudsters and, get this, the shareholders of the accounting firms (!!). The New York Court of Appeals abandoned the shareholders and creditors of Refco and AIG for criminals and incompetents.
If I were writing this decision as a novel of corporate cronyism to the extreme in a Utopian nirvana for capitalist parasites, I could not have imagined more contemptible excuses for judicial cowardice.
Those “flunky amicus brief toadies” include the AICPA, the New York State Society of CPAs and the Center for Audit Quality, who argued that our very capital market system was at risk if accounting firms (and other professionals) could be held responsible for fraud perpetrated by management.
We share Francine’s passion for holding accountants responsible for their culpability (plus, claiming “we were duped” does nothing for the industry’s reputation) but the ruling hardly comes as surprise. Judge Susan Phillips Read wrote for the majority:
The speculative public policy benefits advanced by the Litigation Trustee and the derivative plaintiffs to vindicate the changes they seek do not, in our view, outweigh the important public policies that undergird our precedents in this area or the importance of maintaining the “stability and fair measure of certainty which are prime requisites in any body of law” (Loughran, Some Reflections on the Role of Judicial Precedent, 22 Fordham L Rev 1, 3 [1953]). We are simply not presented here with the rare case where, in the words of former Chief Judge Loughran, “the justification and need” for departure from carefully developed legal principles are “clear and cogent” (id.). Finally, to the extent our law had become ambiguous, today’s decision should remove any lingering confusion.”
[…]
We are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice.
In other words, these particular cases didn’t present a situation that demonstrated a desperate need for change in the law nor would it prove to be a helpful deterrent of fraud in the future. Bottom-line seems to be that Francine is upset at the majority’s pragmatic attitude but what do you expect from a panel of seven judges? It’s a long shot that you come across more than a couple of judges who are willing to turn years of case law inside out and upside down just because a company went bankrupt or a pension fund lost value.
That being said, there was a very enthusiastic and compelling dissent that basically calls auditors a bunch of pansies when it comes to accepting professional responsibility, “[I]t seems that strict imputation rules merely invite gatekeeper professionals ‘to neglect their duty to ferret out fraud by corporate insiders because even if they are negligent, there will be no damages assessed against them for their malfeasance.’ ” You can check out more over at RTA.
As far as the audit firms are concerned, they have to breathing a huge sigh of relief. Considering all the lawsuits out there, firms are already slowly bleeding to death by paper cuts. If this case had gone the other way, it could very well have been a mortal wound for the firms.
Kirschner v KPMG LLP [NY Court of Appeals]
Third-Party Liability Ruled Out in N.Y. Suits for Corporate Misdeeds [New York Law Journal]
New York Court of Appeals Stands By Corporate Man: In Pari Delicto Prevails [Re:The Auditors]
We are a small business and had a ton of companies approach us to apply for this credit. We researched it and determined it did not apply to us. We did not take a dime. The IRS should run the numbers on anyone that did.
start with the Law Firms that got $350K+ , then the Drs- they did the same as Liars/Lawyers
What’s ERC?
Employee Retention Credit – it is the “$26,000 per employee” ads that have been everywhere for the last 3 years. It was originally part of the CARES Act along with the PPP but originally you couldn’t do both. It was changed at the end of 2020 to allow that – unscrupulous promoters jumped on it and the IRS paid out indiscriminately without enough upfront screening. IRS is now starting to audit after the fact and bring the hammer down.
Yeah, basic law of journalism, don’t assume.
ERC is Employee Retention Credit, the refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic.
This is a publication for accounting professionals, they know what ERC is as we’ve been covering the fallout extensively. We didn’t expect this article would get so much attention from civvies.
“Employee Retention Credit” is right there in the first sentence.
As a “civvie” business owner I have been scouring the web for an explanation why we have not received our ERC money which we qualified for to my detriment, kept every paid when there was no work and I assumed loans to keep my talent.
We applied last March, in house with known accountants that we have been working with for years, I paid a fair percentage and them knowing me I would not tolerate anything that would compromise my name and integrity.
We are now a year in and the loans have not been paid back, as soon as if and when that ERC check hits it is gone and I have to pay tax on it next year. I appreciate your article at least I have insight but I am angry that as a rule follower and always putting my customers and employees first that I am now in limbo because of others greed.
We prepared several dozen of these and have had 2 audits which we passed with flying colors. If the IRS wants to look at any others we prepared, my PTIN, name and number are at the bottom of each of them, they know where to find me.
We also turned away many people who did not qualify and more who qualified for only a small number. I’m sure those folks went out and and got one of the ERC mills.
If a complete and honest accounting is ever done of this credit I believe is will prove to be the largest fraud in history. Billions were paid out with no verification or oversight. Dishonest “$26,000 per employee” service providers based their marketing pitch on “your CPA doesn’t know what he’s talking about” and charged a preposterous 25% contingent fee (which flies in the face of Circular 230). They are closing up shop and heading for the hills with millions in ill-gotten taxpayer money.
I have a modicum of sympathy for the business owners who were duped into this, but exactly none for the ERC mills and their owners / employees. We should all be rooting for the IRS to nail these people – they belong in jail.
I had a small business, with an annual payroll of about 120,000. I did get some ERC money, nothing near the 26K per employee because you had to not count wages paid with Payroll Protection Program money, and any other programs. It was extremely complicated, per person wage caps etc, even when my CPA tried to explain it to me with a color coded spread sheet, still was lost (and I was Mensa in college). But I got SO many mailings of misleading information promising large sums. These companies sprang up, charge an exhorbitant percentage (which makes no sense, my cpa charges set rates) and they will be long gone when you get audited and fined and have to pay it all back. Good luck explaining their math. My cpa turned down many of his clients that did not qualify, and now is having to file amended returns for them, when they had the ERC credit done by one of these gypsy companies, since you must report the money back in the year you had the wages for the ERTC (is what I knew it as). I never want trouble with the IRS, too stressful.