U.S. Court Upholds Engagement Letter Language on Misrepresentations

The U.S. Court of Appeals for the Ninth Circuit earlier this year affirmed a U.S. District Court ruling in favor of a CPA firm in the case Mosier v. Stonefield Josephson, filed Feb. 23, 2016. The appellate court’s decision is significant and breaks new ground in California’s laws governing claims against auditors (and other professionals).

One of the notable items is the affirmation that contractual provisions that prospectively release claims when there has been a misrepresentation to an auditor or other professional may be enforced. The appellate court cited the contractual engagement agreement between the firm and the client — an agreement that states that the CPA firm would not be responsible for any misrepresentations made by the client.

A fundamental expectation in most, if not all, engagements is that management understands and accepts full responsibility for the accuracy and completeness of the information and representations made to the firm during the course of rendering services. The Court of Appeals in this case gives credence to the use of engagement letter language that provides that if the client makes misrepresentations to the accountant in the course of their work, the client is waiving the ability to later assert a claim against the accountant related to those misrepresentations. This may sound like common sense, and certainly this is an argument that can be made and prevail in court even absent the contract language; but with the support of this appellate decision, CPAs are better positioned to use this language and afford themselves further protection. While the specific case involves audit services, the court’s decision would apply to engagement letter language pertaining to other professional services as well.

Below is some suggested engagement letter language for your reference.

In accordance with the terms and conditions of this agreement, [Client] shall be responsible for the accuracy and completeness of all data, information and representations provided to us for purposes of this engagement. Because of the importance of oral and written management representations to the effective performance of our services, [Client] releases and indemnifies our firm and its personnel from any and all claims, liabilities, costs and expenses attributable to any misrepresentation by management and its representatives.

If you have any questions, please contact CAMICO at 1.800.652.1772 or email the Loss Prevention Department at lp@camico.com. To view the entire court decision, click: View the Document (PDF).

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