Carefully considered engagement letters can reduce the exposure to otherwise untimely accounting mal

Countless articles and lectures addressing risk management for accountants have preached the benefits of carefully tailored engagement letters for all clients. While the accounting professionA?a,?a,,?s utilization of engagement letters has come a long way, many firms, including some of the largest firms in the world, do not devote as much energy as they should to properly confirming the terms of every engagement. The recent New York County Supreme Court decision in Apple Bank for Savings v. PricewaterhouseCoopers, LLP (Sup. Ct., N.Y. County, Index No. 603492/06, Feb. 5, 2008) illustrates how the failure to carefully consider the importance of an engagement letter for all aspects of client engagements can expose accountants to malpractice claims in New York that otherwise would be untimely and barred by the statute of limitations. In New York, a claim for accounting malpractice must be commenced within three years after the claim accrued. Accrual is measured from the time when the accountantA?a,?a,,?s work product (i.e., tax return or audit opinion) is presented to the client regardless of whether the client is aware of any negligence at that time. However, New YorkA?a,?a,,?s three-year statute of limitations may be extended in certain circumstances where the accountant has A?a,?A"continuously representedA?a,?? that client. Continuous representation in this context is not merely a long-standing professional relationship A?a,?aEUR? it arises A?a,?A"only [where] the defendant continues to advise the client in connection with the particular transaction which is the subject of the action.A?a,?? In the past two years, New YorkA?a,?a,,?s appellate courts have addressed the A?a,?A"continuous representationA?a,?? doctrine in the context of accounting malpractice actions on several occasions and, generally, have limited the application of that doctrine. In Williamson v. PricewaterhouseCoopers LLP, the New York Court of Appeals held that the continuous representation doctrine did not save the plaintiffA?a,?a,,?s otherwise untimely audit failure claims because A?a,?A"the Funds entered into annual engagements with defendant for the provision of separate and discrete audit services for the FundsA?a,?a,,? year-end financial statements, and once defendant performed the services for a particular year, no further work as to that year was undertaken.A?a,?? In reaching this holding, the court specifically noted that A?a,?A"the nature and scope of the partiesA?a,?a,,? retainer agreement (engagement) play a key role in determining whether A?a,?Eoecontinuous representationA?a,?a,,? was contemplated by the parties.A?a,?? In Apple Bank for Savings v. PricewaterhouseCoopers, LLP, the plaintiff bank alleged that PWC negligently advised the bank in 1999 that redemption of the stock held by the estate of its deceased sole stockholder would not result in any negative income tax consequences. PWC audited the bankA?a,?a,,?s year-end financial statements and prepared its annual income tax filings for the years 2000 through 2004. The bank redeemed stock in each of these years and PWC treated the redemptions as if they had not triggered any negative tax consequences. However, in July 2005, PWC advised the bank that the redemptions had caused the bank to incur substantial income tax liability and ultimately urged the bank to file amended tax returns for the years 2000 through 2003, which required the bank to pay $12 million in additional taxes and interest. The bank commenced suit in October 2006, and PWC moved to dismiss the claims as time-barred insofar as they were based on the services provided for the years 2000 through 2002. Following the holding of the Williamson case, the court dismissed the claims based on the audit services for the years 2000 through 2002 A?a,?A"because each was governed by a separate engagement letter and each engagement ended more than three years before AppleA?a,?a,,?s complaint was filed.A?a,?? However, the court reached the opposite conclusion when it considered the tax preparation services. Although PWC had the bank sign a formal engagement letter in connection with each of the audit engagements, PWC did not have the same kind of formal engagement letter confirming the scope of the tax services to be provided to the bank. While the letters confirming the audit engagement services specifically stated they were A?a,?A"engagement lettersA?a,?? and contained a signature line for the bank to indicate its acceptance of those services, the letters addressing the tax services stated that they were A?a,?A"estimates of the professional fees for preparation of the Federal, state and local income tax returns A?a,?? and review of the estimated tax declarations,A?a,?? which were signed only by PWC without a signature line for the bank to accept the stated terms in the letter. Additionally, the audit engagement letter indicated that any services beyond those spelled out in the letter would be the subject of a separate written agreement, while the tax services letters merely indicated that any additional services would be subject to an additional fee, suggesting to the court that additional services were contemplated. Based on these differences between the two types of letters, as well as certain other factors mentioned in the decision, the court concluded that there was a question of fact whether the continuous representation doctrine applied to the tax services and denied that portion of PWCA?a,?a,,?s motion to dismiss the claims as time-barred insofar as they were based on the tax services provided for the years 2000 and 2001.

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