Epic v. Cliftonlarsonallen LLP

• Citation: 402 P.3d 320,199 Wash.App. 257
• Decision Date: 20 June 2017
• Docket Number: No. 34540-8-III.,34540-8-III.
• Court: Court of Appeals of Washington
• Parties: EPIC, a non-profit corporation, Appellant, v. CLIFTONLARSONALLEN LLP, a limited liability partnership, and Ralph Conner, an individual, Respondents.

199 Wash.App. 257

402 P.3d 320

EPIC, a non-profit corporation, Appellant,

v.CLIFTONLARSONALLEN LLP, a limited liability partnership, and Ralph Conner, an individual, Respondents.

No. 34540-8-III.

Court of Appeals of Washington, Division 3.

JUNE 20, 2017

Eric Ronald Hultman, Hultman Law Office, 218 Main St., Kirkland, WA, 98033-6108, for Appellant.

Robert C. Tenney, Attorney at Law, Mark David Watson, P.O. Box 22680, Yakima, WA, 98907-2680, Charles Jones, Moss & Barnett, 150 South Fifth Street, Suite 1200, Minneapolis, MN, 55402, for Respondents.

Fearing, C.J.¶1 Is an auditor engagement agreement provision, which imposes a deadline for filing suit, against the auditor, within two years from the date of the last audit report, a reasonable and enforceable stipulation when the auditor's client had one year to file suit after it should have discovered any breach of duty by the auditor and any resulting damages? Plaintiff Enterprise and Progress in the Community (EPIC) appeals from a summary judgment dismissal of its suit against its former auditing firm, CliftonLarsonAllen LLP (CLA), for negligence and breach of contract. We hold the contractual provision to be reasonable under the circumstances and affirm the trial court's dismissal of the suit.

FACTS

¶2 Plaintiff EPIC, a nonprofit corporation, operates a Head Start program funded by the United States Department of Health and Human Services Administration for Children and Families (HHS). Defendant CLA is the successor to EPIC's former auditing firms, Lemaster & Daniels PLLC and LarsonAllen LLP. This statement of facts will refer to all iterations of the auditing firm as CLA.

¶3 From 2006-2011, EPIC entered annual engagement agreements with CLA to audit EPIC's financial statements and determine whether EPIC complied with federal grant regulations. Each engagement agreement contained clauses that required EPIC to commence any legal action arising from the audits within two years. The limitations clause pertaining to the 2006-2009 audits stated:

It is agreed by Client [EPIC] and [Lemaster & Daniels PLLC] [CLA] or any successors in interest that no claim arising out of services rendered pursuant to this agreement by or on behalf of Client shall be asserted more than two years after the date of the last audit report issued by [Lemaster & Daniels PLLC].

Clerk's Papers (CP) at 38, 44, 52, 57 (emphasis added). The limitation clauses in the 2010-2011 audit agreements declared:

Time limitation

The nature of our services makes it difficult, with the passage of time, to gather and present evidence that fully and fairly establishes the facts underlying any Dispute. We both agree that, notwithstanding any statute or law of limitations that might otherwise apply to a Dispute, any action or legal proceeding by you against us must be commenced within twenty-four (24) months ('Limitations Period') after the date when we deliver our final audit report under this agreement, regardless of whether we do other services for you relating to the audit report, or you shall be forever barred from commencing a lawsuit or obtaining any legal or equitable relief or recovery.

The Limitation Period applies and begins to run even if you have not suffered any damage or loss, or have not become aware of the existence or possible existence of a Dispute.

CP at 70, 79 (emphasis added). All engagement agreements defined "dispute" as "[a]ny disagreement, controversy, or claim that may arise out of any aspect of our services or relationship with you." CP at 70, 79.

¶4 Pursuant to the agreements, CLA delivered the following audit reports to EPIC on the following dates:

                      2006 audit report     May 22, 2007
                      2007 audit report     March 17, 2008
                      2008 audit report     June 29, 2009
                      2009 audit report     May 18, 2010
                      2010 audit report     March 28, 2011
                      2011 audit report     September 19, 2012
                      2012 audit report     June 25, 2013
                

CLA last prepared an audit for EPIC for the 2012 year. We do not know if EPIC's financial year was the same as the calendar year.

¶5 On January 17, 2012, HHS notified EPIC that EPIC violated federal regulations by using 2011 grant money to pay expenses for another year. The disbursements reported to HHS by EPIC for 2011 exceeded the disbursements reflected in EPIC's internal accounting records. Under federal regulations, a Head Start recipient must expend grant money received on obligations incurred during the funding period to the award, rather than accumulate the money for later payments. Among other untimely payment of bills, EPIC, in January 2011, wrote a check to one vendor but did not deliver the check to the vendor until June because of a cash flow problem. The notification directed EPIC to correct its violation of the HHS regulation within ninety days or such additional time, up to one year, as approved by an HHS official.

¶6 Shortly after receiving HHS's notice EPIC confirmed that Walter Abegglen, EPIC's chief financial officer, used grant funds from one grant year to pay expenses incurred in a different grant year. EPIC contends that Abegglen lacked knowledge that the delayed expenditures breached HHS rules. Abegglen claimed that he moved "money around just so accounts balanced." CP at 169. In February 2012, EPIC fired Abegglen due to his inability to lawfully manage Head Start funds.

¶7 After terminating Walter Abegglen's employment, EPIC's Executive Director Gary Hudson tasked EPIC's controller to investigate the rule violations alleged by HHS. EPIC's controller learned that Abegglen charged expenses incurred in the last quarter of one year to the first quarter of the next year.

¶8 Shortly after receiving the January 2012 notice EPIC began experiencing costs to address the financial problems associated with the misuse of HHS grant funds and the prospect of HHS demanding repayment of misused funds. In April 2012, EPIC borrowed $620,000 in anticipation of repayment.

¶9 On September 19, 2012, CLA delivered the 2011 audit report to EPIC. The 2011 report identified the misuse of grant funds alleged by HHS and warned that the misuse started at least by the 2009 grant year. Note 12 in the 2011 audit report states:

Net assets at the beginning of 2011 have been adjusted to properly reflect cash receipts on accounts receivable for prior years and to match grant expenditures without reimbursements applicable to prior years. The adjustment resulted in a decrease in net assets and an increase in accrued expenses of $331,095. The effect of the restatement on the previously reported change in net assets for the year ended December 31, 2010 has not been determined.

CP at 111. The audit report also read:

As described in items 2011-01, 2011-02, and 2011-03 in the accompanying schedule of findings and questioned costs, EPIC did not comply with requirements regarding cash management and period of availability of federal funds that are applicable to its Head Start Cluster. Compliance with such requirements is necessary, in our opinion, for EPIC to comply with the requirements applicable to that program.

CP at 115. CLA further described the misuse of grant funds in the audit's Finding 2011-02 that stated:

Condition: EPIC drew down funds from current Head Start grants for expenditures incurred in previous grant years.

Questioned Costs:

$448,885 related to November 1, 2010 through October 31, 2011 grant year

$477,320 related to November 1, 2011 through October 31, 2012 grant year

Context: During the reconciliation process of accounts receivable and grant draw downs, it was noted that the expenses incurred in the last month of the previous grant year were claimed on the current year grant draw down. This occurred for at least two consecutive prior grant years. The questioned costs noted above are the amounts dawn down on the respective grants to pay expenses incurred in October 2010 and October 2011.

....

Recommendation: Management and the board of directors should establish policies that prevent management override of internal controls and procedures to ensure that expenditures incurred and reimbursed by Head Start are matched in the appropriate period.

Views of Responsible Officials and Planned Corrective Actions: Management acknowledges finding. During the reconciliation process of accounts receivable, grant draw downs, and preparation of the second quarter 2012 draw down report, management discovered a discrepancy in the expense report from 2009. Management is currently working with the office of Head Start to resolve this issue.

CP at 119.

¶10 EPIC contends that Chief Financial Officer Walter Abegglen also mismatched expenses with grant funds in years 2007 to 2010. According to EPIC, if CLA had identified these errors in earlier audits, EPIC would not have repeated the error in 2011, and HHS would not have complained of any errors. HHS never detected any regulation violations before the 2011 grant year. Because the earlier CLA audits exposed no accounting errors, EPIC management concluded that EPIC complied with HHS regulations.

¶11 EPIC attempted to cure the deficiencies identified by HHS, in its January 17, 2012 notification, by a department deadline of December 31, 2012. EPIC secured a loan for $350,000 to cover the amount of expenses in dispute. We do not know the relationship between the $350,000 loan and the April 2012 $620,000 loan. Unfortunately, the lender did not disburse the $350,000 loan until after January 2013. Accordingly, on February 8, 2013, HHS notified EPIC that it must repay $1,146,039 of the 2011 grant within thirty days. In June 2013, EPIC relinquished its 2013 $7,514,963 grant and its 2014 $12,392,427 grant in order to remain eligible for grants after 2014. In August 2013, HHS agreed to reduce EPIC's repayment amount to $303,287.

¶12 According to EPIC Executive Director Gary Hudson, when HHS reduced the amount of repayment in August 2013, EPIC focused on learning how the mismatching occurred, calculating the extent of the mismatching, and ascertaining whether CLA...