New Law Protects CPAs from Third Party Suits

LANSING – It's a change in law that to some might seem obscure.

But to certified public accountants (CPAs), the new Michigan legislation that clarifies liability in certain dealings with non-clients is important.

John Lindley, vice president of government relations and regulatory affairs for the 17,800-member Michigan Association of Certified Public Accountants, said newly signed Public Act 268 returns Michigan to a standard put in place in 1995 that set up a "bright-line" test for liability that CPAs would have when a non-client uses the CPA's work.

"We think the takeaway of this is that it gives more clarity to the courts in determining whether there is standing to sue," Lindley said.

For example, if a company engaged a CPA to compile financial statements that would be relied upon by a third party, like a bank holding a line of credit, the 1995 law required an exchange of letters between the corporate client and CPA. Those communications needed to state that a third party would be relying on the CPA's work.

The law also specified that the written communication must occur at the time of engagement of the CPA.

Those conditions were parameters affecting when a CPA could be sued for malpractice by a third party and be held liable for civil damages in connection to the services they performed.

But Lindley said a recent court ruling in southwest Michigan blurred that liability test, in one instance allowing the written communication to come not from the client but from an outside bookkeeper.

The Van Buren County circuit court also found that the 1995 law was not clear in defining what was meant by "at the time of engagement," and allowed communications exchanged after the notice of engagement to qualify, Lindley said.

As a result, the court ruling could have widened the instances in which a CPA could be sued for negligence by non-client users of their work.

But Michigan Association for Justice, which represents trial lawyers, sees the legislation as restricting the ability of people to bring claims that may be legitimate.

Bill Flory, the association's legislative counsel, said the new legislation would limit the number of people that would have the ability to bring a claim.

The association also opposes language that says that a CPA would not be liable in a situation involving a non-client claimant if the required written communications were not signed by the proper individuals.

He said that while the bill was improved as it went through the state House, the association remains opposed to it in principle.

"It's one of these things where we don't like to see these kinds of restrictions added," Flory said.

Lindley said the new law, sponsored by Sen. Tonya Schuitmaker, R-Lawton, clarifies a formerly murky law.

"This is not about reducing CPA liability or CPAs not being responsible to whom they should be," said Lindley. "This is about CPAs knowing who their audience is, and being accountable to who they should be accountable to."

The bill was signed into law in late June.

Amy Lane is the capitol correspondent for Crain's Detroit Business.