Commercial Division Blog

Posted: July 1, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Category Fiduciary Duties

Accountant May Owe Fiduciary Duties to Client in Limited Circumstances

On June 28, 2022, the First Department issued a decision in Gerzog v. Goldfarb, Case No. 2022-00071, holding that an accountant owes fiduciary duties to a client when it is alleged that the accountant knew of and concealed illegal acts and diversions of funds yet failed to withdraw in the face of a conflict of interest, explaining:

As to Migden, plaintiff also raises an issue of fact as to the applicability of the exception to the general rule that accountants do not owe clients fiduciary duties. That exception applies “where the allegations include knowledge and concealment of illegal acts and diversions of funds and failure to withdraw in the face of a conflict of interest” (Nate B. & Frances Spingold Found. v Wallin, Simon, Black & Co., 184 AD2d 464, 465- 466 [1st Dept 1992]).

Plaintiff has submitted evidence from which the factfinder could conclude that Migden falsely classified Goldfarb’s personal expenses as case preparation expenses on income tax returns, with knowledge that deducting these expenses would reduce the profits available to be paid to plaintiff and that classifying them in this way would conceal the wrongdoing. The fact that plaintiff had access to his K-1s and the firm’s tax returns is immaterial because his claim is that the true nature of Goldfarb’s personal expenses was not obvious on the face of those documents. Plaintiff also submitted evidence indicating that Migden was responsible for categorizing expenses as deductions and did not simply rely on Goldfarb’s assessment. The parties also offered conflicting expert opinions regarding whether an accountant’s duties run to all partners or only to the partner in charge of tax matters. However, whether Migden owed a duty to plaintiff personally is irrelevant to the accounting malpractice claim, which was asserted derivatively on behalf of the firm.

The general rule is that accountants, unlike lawyers, do not owe fiduciary duties to their clients. But as this case shows, there are exceptions to this rule. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning an accountant's liability for breach of fiduciary duty.

***Schlam Stone & Dolan represents the plaintiff-respondent in this case.