Businesses rely on accountants to keep their financial records accurate and their tax filings compliant. However, when an accountant makes a critical error or fails to uphold professional standards, it can cost the business real money. Recognizing when an accounting mistake may lead to a legal claim can help a business protect its finances.
Grounds for filing a lawsuit against an accountant
When an accountant’s misconduct costs a business money, the business can file a malpractice claim seeking to recover those losses. To succeed, the business must show that the accountant’s actions – not just an unfavorable outcome – directly caused the financial harm. Under California law, that misconduct typically falls into one of the following categories:
- Professional negligence: Failing to perform the work to the standard a reasonably competent CPA should meet, such as overlooking an error that a diligent professional would have identified.
- Breach of contract: Failing to do what the engagement letter requires, such as filing a return late or leaving an audit unfinished.
- Fraud or misrepresentation: Knowingly lying, hiding a mistake or giving the business false information about its finances.
- Breach of fiduciary duty: Misusing the business’s money or putting someone else’s interests, like their own or another client’s, ahead of the business they are supposed to serve.
Identifying which of these categories applies is only the first step; the business still needs evidence to prove it happened. This means gathering the engagement letter, financial statements and any emails or notes that show the accountant was aware of the error or acted with intent to deceive.
Legal options after accounting malpractice occurs
California law imposes strict filing deadlines on accounting malpractice claims, so businesses must act quickly once an error comes to light. Consulting an attorney early on helps determine whether the case is strong enough to pursue and what evidence it will require. Once the business establishes the full scope of the harm, it can weigh its options by moving forward with pre-suit settlement negotiations or a formal lawsuit.