By Lawrence R. Donaldson, Esq., Plunkett Cooney PC
Some may recall an article in the March/April Leaders’
Edge in 2001 discussing the Michigan Supreme Court decision in Levy v
Martin, 463 Mich 478, 620 NW2d 292 (2001). The case involved tax preparation
services covering a span of years.
| Members of the profession are urged to use engagement letters and termination or end-of-engagement letters as a means to separate ongoing relationships into separate, distinct, discrete engagements. |
The plaintiff claimed “continuous representation” over the entire period, resulting in all the years being “the matters out of which the claim arose,” and, thus, within the “two years from the date of last service” rule under the Statute of Limitations. (MCLA 600.5838) The accountant/defendant claimed separate, distinct, discrete engagements, with the completion of each starting the two-year Statute of Limitations running against claims resulting from that year’s service. Defendant claimed that as a result the earlier years’ claims were time-barred.
In that decision, the Court ruled the accountants had not established that each annual tax return was a separate engagement. The Court said, “We note that the result may have been different if defendants had come forward with documentary evidence that each annual income tax return preparation was a discrete transaction that was in no way interrelated with other transactions.” [Id. At 490, n 19]
Recent Court of Appeals Note
The Michigan Court of Appeals has taken note of the Levy ruling, holding in City of Pontiac v PriceWaterhouse Coopers LLP, (Unpublished decision Docket # 275416, dated February 12, 2008), that where the accountant can show the services rendered in a particular year were part of an engagement separate and distinct from the services rendered in the previous or succeeding year, the two-year period within which to file a claim regarding that year began to run on the “date of last service” for that year.
PWC began providing audit services in 1993. The City claimed breaches of professional audit standards for the years 2000 through 2003, and a breach with respect to GASB 34 services. The Court found that claims regarding the 6/30/02 FYE audit (and earlier) were time barred, because the “date of last service” for the 2002 audit was the date of the audit report, and the complaint was not filed until more than two years later.
In reaching this decision, the Court made the following important comments:
| “Defendant filed copies of specific engagement letters for
the audits for the fiscal years ending on June 30 of 2001, 2002
and 2003, respectively, and provided plaintiff with reports
regarding the audits. Each letter specified the estimated fee
for the audit engagement and indicated that it reflected the
parties’ entire agreement relating to the services covered by
the letter. The letter for the fiscal year ending June 30, 2003,
contained an estimated fee for the additional work required to
implement GASB 34, and specified that any additional services
that may be requested would be the subject of separate written
agreements.” (Opinion, page 5) “Although audit reports for each fiscal year may guide a plaintiff in preparing its financial statements for each subsequent year, the mere fact that there might be some connection between annual financial statements does not support an inference that a professional relationship continued between the parties, with its accompanying air of trustworthiness, from year to year without interruption. The evidence of defendant’s separate engagement letters
detailing the terms of each audit shows that each audit
constituted the type of discrete transaction that our Supreme
Court in Levy, supra at 490 n 19, observed could
separately constitute ‘the matters out of which the claim for
malpractice arose.’ ” (Opinion, page 6,7) |
In the Levy decision, Justice Markman dissented and wrote that,
even under the facts of that case, there were separate, distinct, discrete
engagements, each of which was entitled to a determination of its own “date
of last service.” The Court of Appeals here, noting the Levy
majority’s position that the defendant has to establish the separate
engagements, confirms that the consistent use of engagement letters for that
purpose is an effective tool for separating your long-term relationships
into the separate, distinct, discrete engagements that they represent.
Lesson to Heed
So, continue using engagement letters, even for the smallest engagement
(including 1040 tax preparation), and, just to put some icing on the cake,
use end-of-engagement letters to carve in stone the “date of last service,”
and to start the clock running, on any claim that might arise out of those
services just completed.
About the Author
Lawrence R. Donaldson, Esq., a senior shareholder in the Mount Clemens
office of Plunkett Cooney PC, served eight years on the State Board of
Accountancy, and serves as counsel to MACPA.
© 2008 Lawrence R. Donaldson