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By: Eric Martignetti
Today, Massachusetts’ highest court did away with an important defense for an accountant who faces a claim of accounting malpractice brought by a client who has committed fraud. In Chelsea Housing Authority v. Michael E. McLaughlin et al., the Supreme Judicial Court held that Mass. Gen. Laws c. 112, § 87A ¾ pre-empts the common law doctrine of in pari delcito. Accordingly, as the SJC held, “where a plaintiff sues an accountant for negligently failing to detect the fraudulent conduct of the plaintiff, the plaintiff may recover damages from the accountant, but only for the percentage of fault attributed to the accountant (as compared to the fault of all others whose fraudulent conduct contributed to causing the plaintiff’s damages).”
After a lengthy examination of the legislative history of § 87A ¾, the SJC concluded that “the Legislature sought to remedy… not only the potential unfairness to accountants of joint and several liability, but also the need to hold accountants accountable for negligently failing to detect and reveal financial fraud committed by their client and its officers.”
Before today’s decision, in pari delicto was a powerful defense because it generally prevented an accountant from being held liable for accounting malpractice where a client committed fraud and was at least “in equal fault” with the accountant. After today’s decision, however, the in pari delicto defense is no longer available to an accountant where a client has committed fraud.
Importantly, because § 87A ¾ applies to all individuals or firms licensed to practice pubic accountancy in Massachusetts, accountants performing any level of services—whether compilation, review, or audit—face potential liability where a client has committed fraud. Although an accountant’s liability is limited to “the percentage of [its] fault in contributing to the plaintiff’s damages,” its liability cannot be eliminated altogether by in pari delicto.
If you have questions or would like more information, please contact Eric Martignetti at email@example.com.