Children's Wish Foundation International, Inc. v. Mayer Hoffman McCann PC, No. WD 70616 (Mo. App. 4/27/2010)
| Decision Date | 27 April 2010 |
| Docket Number | No. WD 70616.,WD 70616. |
| Parties | CHILDREN'S WISH FOUNDATION INTERNATIONAL, INC., Appellant, v. MAYER HOFFMAN McCANN PC, ET AL., Respondents. |
| Court | Missouri Court of Appeals |
Appeal from the Circuit Court of Jackson County, Missouri, The Honorable Robert M. Schieber, Judge.
Before Division Four: Thomas H. Newton, Chief Judge, Presiding, James M. Smart, Jr., Judge and Cynthia L. Martin, Judge.
This case arises out of a claim for professional negligence asserted by Children's Wish Foundation, International, Inc. ("CWF") against Mayer Hoffman McCann, P.C. ("Mayer Hoffman") and CBIZ Accounting, Tax & Advisory of Kansas City, Inc. ("CBIZ") relating to Mayer Hoffman's audit of CWF's financial statements and CBIZ's preparation of CWF's tax returns. Following a jury trial, verdicts were returned in favor of Mayer Hoffman and CBIZ. CWF appeals claiming instructional error. CWF contends the trial court erred in submitting a contributory negligence instruction because such an instruction is not an appropriate defense in a professional negligence action involving only economic loss. CWF suggests that, at most, a comparative fault instruction should have been submitted pursuant to the authority of Gustafson v. Benda, 661 S.W.2d 11 (Mo. banc 1983). Finally, CWF contends that if contributory negligence remains an appropriate defense in economic loss negligence cases, Missouri should adopt the "audit interference rule" to limit contributory negligence submissions to scenarios where the client's negligence prevents the auditor from performing its duties. We affirm.
CWF is a charitable organization. CWF grants wishes to terminally or seriously ill children. CWF is managed by a husband and wife team, Arthur Stein and Linda Dozoretz. Stein is the President of CWF. Dozoretz is the executive director.
Charitable organizations are evaluated on the amount of their fundraising expenses expressed as a charity's "cost to raise a dollar." In March 1998, a new accounting rule known as Statement of Position 98-2 was issued. CWF was advised this new rule would require CWF to record certain expenses as fundraising costs instead of program services, negatively impacting its publicly reported cost to raise a dollar. In response to the impending rule change, Stein and Dozoretz expanded CWF's gifts in kind program.
A gift in kind is a donation to a charitable organization in the form of property. CWF pays an administrative fee to clearinghouses for surplus goods, books, or toys. CWF then distributes these items to hospitals and Ronald McDonald Houses. The administrative fee paid by CWF to obtain the items is markedly lower than the value of the goods CWF can report as a charitable contribution. The intended effect of expanding the gifts in kind program was to reduce CWF's cost to raise a dollar.
During the fiscal year ending June 30, 1999, CWF's gifts in kind increased by more than tenfold from approximately $500,000.00 to $5,500,000.00. Gift in kind orders, receipts, and shipments were all managed and recorded by CWF employees. The record reflects some question as to whether CWF's employees were adequately skilled and/or trained to manage the challenging inventory and record keeping requirements for gifts in kind, particularly given the substantial increase in volume over a short period of time.
Mayer Hoffman was retained by CWF in 1991 or 1992 to provide various accounting services, including the preparation of annual financial statement audits. Mayer Hoffman provided these services to CWF through the preparation of a financial statement audit for the fiscal year ending June 30, 1999.
In connection with the audit for fiscal year ending June 30, 1999, CWF signed an audit engagement letter with Mayer Hoffman. The audit engagement letter stated that the objective of the audit was to permit Mayer Hoffman to express an opinion about whether CWF's financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles ("GAAP"). The engagement letter indicated that the audit would involve tests of CWF's accounting records and other procedures as Mayer Hoffman considered necessary to enable it to express such an opinion, including "tests of documentary evidence supporting the transactions recorded in the accounts, tests of physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected customers, creditors, and banks." The engagement letter advised that Mayer Hoffman would "plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by error or fraud." However, the engagement letter warned that:
Our audit is designed to provide reasonable rather than absolute assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole; therefore, a material misstatement may remain undetected. Consequently, our audit will not necessarily detect misstatements less than this materiality level that might exist due to error, fraudulent financial reporting, or misappropriation of assets.
The engagement letter notified CWF that it was responsible for making all financial records and related information available, and for the accuracy and completeness of its records.
Auditors from Mayer Hoffman's Kansas City office arrived at CWF's Atlanta, Georgia headquarters to perform field audit work in August 1999. A spreadsheet of the fiscal year 1999 gift in kind transactions prepared by CWF employees was provided to Mayer Hoffman for its audit work. The spreadsheet summarized, among other things, a beginning number of pallets for each gift in kind item, the quantity of items contributed to either a hospital or a Ronald McDonald House, the fair market value of the gifts in kind, and the number of pallets of each gift in kind remaining in inventory. Mayer Hoffman's representative's testified that they believed the beginning number of pallets for each gift in kind item shown on CWF's spreadsheet represented the number of pallets of that item actually received by CWF from the clearinghouses.
In the course of its audit, Mayer Hoffman discovered an error in the fair market value assigned by CWF to each unit of a particular gift in kind item that remained in CWF's inventory. Mayer Hoffman made a downward adjustment in the total value of this item remaining in inventory. Mayer Hoffman did not make a downward adjustment in the total value of the same item contributed by CWF during the year.
Because of the significant increase in gifts in kind, and because of the valuation error Mayer Hoffman discovered, Mayer Hoffman attempted to confirm from outside sources the fair market value of the gifts in kind. First, Mayer Hoffman contacted the clearinghouses from whom the gifts in kind had been obtained to see if the clearinghouses would provide the fair market values attributed to the items by the original contributors of the items. The clearinghouses could not reveal this information. Thus, Mayer Hoffman secured a written confirmation from the two clearinghouses from which CWF had obtained most of its gifts in kind. The gift in kind spreadsheets CWF had prepared were provided to the two clearinghouses. Both clearinghouses signed and returned a confirmation letter that had been prepared by Mayer Hoffman. The letter said that "as to the question of the merchandise received from [clearinghouse], our records do not appear to contradict the information that you have supplied." (Emphasis added.) Mayer Hoffman thus concluded that the fair market values attributed by CWF to the gift in kind items shown as contributed on CWF's spreadsheet were materially accurate. The fair market value for contributed gifts in kind reflected on CWF's spreadsheet was thus reflected in its financial statements. These financial statements were provided by Mayer Hoffman to CBIZ, a tax preparation entity that is related in some manner to Mayer Hoffman. CBIZ then prepared CWF's 1999 tax return, including its IRS Form 990.
The engagement letter had advised CWF that at the conclusion of its audit, Mayer Hoffman would "require certain written representations from [CWF] about the financial statements and related matters." Mayer Hoffman secured this management representation letter from Stein and Dozoretz on August 24, 1999. In the management representation letter, Stein and Dozoretz indicated they had made available to Mayer Hoffman all financial records and related data for CWF. With respect to the gift in kind values that had been furnished to Mayer Hoffman and included in CWF's financial statements, Stein and Dozoretz represented
On August 24, 1999, Mayer Hoffman issued its Independent Auditor's Report, which was attached to CWF's audited financial statements for the periods ending June 30, 1998, and June 30, 1999. The Report noted The Report described the method of conducting the audit as follows We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant...
To continue reading
Request your trial