KPMG, LLP v. Singing River Health Sys., 2017-CA-01047-SCT
Decision Date | 25 October 2018 |
Docket Number | NO. 2017-CA-01047-SCT,2017-CA-01047-SCT |
Citation | 283 So.3d 662 |
Parties | KPMG, LLP v. SINGING RIVER HEALTH SYSTEM a/k/a Singing River Hospital System |
Court | Mississippi Supreme Court |
ATTORNEYS FOR APPELLANT: R. DAVID KAUFMAN, AMELIA TOY RUDOLPH, PATRICIA ANNE GORHAM, TAYLOR BRANTLEY McNEEL, Biloxi
ATTORNEYS FOR APPELLEE: EDWARD C. TAYLOR, KRISTI ROGERS BROWN, Gulfport
BEFORE RANDOLPH, P.J., COLEMAN AND CHAMBERLIN, JJ.
¶ 1. Singing River Health System a/k/a Singing River Hospital System ("Singing River") sued KPMG, LLP, in Hinds County Circuit Court. KPMG sought to compel arbitration of Singing River's claims. The circuit court declined to order Singing River to the arbitral forum, and KPMG appealed. The Court affirms the trial court's order denying KPMG's motion to compel arbitration and remands the case for further proceedings.
¶ 2. Singing River is a county-owned community hospital and a political subdivision of Jackson County, Mississippi, organized in accordance with the community-hospital statutes and governed by a board of trustees. Miss. Code Ann. §§ 41-13-10 to -107 (Rev. 2013). Singing River is the second largest employer in Jackson County, employing approximately 2,400 employees. KPMG is one of the largest audit, tax, and advisory firms in the United States. KPMG (and its predecessor firm, Peat Marwick) audited Singing River's financial statements from 1978 to 2012.
¶ 3. In fiscal years 2008 through 2012, Singing River's former Chief Financial Officer Michael Crews signed engagement letters issued by KPMG regarding proposed auditing services. The 2008 and 2009 letters had various attachments that contained dispute-resolution provisions. In 2010, 2011, and 2012, KPMG issued a two-page letter, which was to serve as an "amendment" to the March 31, 2009, letter. The only attachment to these two-page letters was a single appendix, labeled "Services and Billing Schedule." For those three years, no separate attachment regarding dispute resolution had been included.
¶ 5. The Committee's minutes are silent as to the terms and conditions of KPMG's 2008 proposal. Additionally, the letters were neither attached to, nor included in, the minutes of the Committee. The very next day, on May 8, 2008, Crews signed the letter "on behalf of Singing River Hospital System," twenty days before the next Singing River Board of Trustees ("Board") meeting.
¶ 6. The Board met on May 28, 2008. The Board minutes concerning the 2008 letter read as follows:
Mr. Crews stated that the Audit & Compliance Committee held a meeting on May 7, 2008, during which they approved the Report on Internal Control, Management Letter, and fiscal year 2008 Engagement Letter, copies of which were included in the agendas in advance of the meeting. After discussion and on a motion by Mr. Cronier and a second by Mr. Strickland, the Board voted unanimously to approve the minutes of the Audit & Compliance Committee meeting held May 7, 2008, Report on Internal Control, Management Letter, and fiscal year 2008 Engagement Letter with KPMG, as presented and included in the minutes by reference.
The Board failed to recite a single term and/or condition of the 2008 proposal in its minutes. For example, the minutes are silent as to the date of the letter; the term or length of the service; the scope of work or service to be performed; the fees, expenses, or charges to be paid by the hospital; and other contractual provisions, including a now disputed resolution clause.2 Although the minutes reflect that copies of the vaguely described documents were included in the Board's agendas in advance of the meeting, the minutes are unclear what meeting the minutes are referencing, i.e. , the Board's meeting or the Committee's meeting on May 7. Finally, although the minutes state that the 2008 letter had been presented and incorporated by reference in the minutes, the letter was not attached to the Board's minutes.
Fiscal Year 2009
¶ 8. The Committee noted that KPMG was to perform a financial statement audit, an A-133 audit, and a benefit plan audit, but the minutes again failed to include any terms or conditions. Further, the letter was not attached to the Committee's minutes. Crews signed the letter "on behalf of Singing River Health System" on May 14, 2009.
¶ 9. Because only two of the four voting members were present at the May 7, 2009, meeting, a telephonic conference was held on June 23, 2009—one day before the Board was scheduled to meet—for the express purpose of approving the actions taken at the May 7 meeting, including approval of KPMG's proposal. The terms and conditions of the 2009 letter were, once again, omitted from the Committee's minutes. Likewise, the letter was not attached to the Committee's June 23, 2009, telephonic conference minutes.
¶ 10. The Board met on June 24, 2009. The minutes of the Board reflect that the Committee's minutes for May and June were unanimously approved, including the approval of KPMG's 2009 proposal:
Mr. Anderson explained that previous to this meeting, a Board member suggested that since there were only two of four Committee members present for the May 7, 2009, meeting that the minutes be approved while there was a quorum present. For this purpose, a phone poll was conducted of the Committee members on June 23, 2009, and minutes were typed to reflect the approval with a full quorum present. Copies of the minutes of the June 23, 2009, phone poll were distributed at the meeting. Mr. Crews explained the purpose of the May 7, 2009, Audit & Compliance Committee meeting. After discussion and on motion by Mr. Strickland and a second by Ms. Tanner, the Board unanimously approved the minutes of the May 7, 2009, Audit & Compliance Committee meeting, and the minutes of the phone poll conducted on June 23, 2009. Then on a motion by Mr. Tolleson and a second by Mr. Strickland, the Board unanimously approved the report on Internal Control, Management Letter, fiscal year 2009 Engagement Letter, and Cost Report Assistance Engagement Letter, all of which were approved by the Audit & Compliance Committee at their meeting held May 7, 2009, as presented and included in the minutes by reference.
Again, the Board failed to include a single term and/or condition of the 2009 letter in its minutes.4 The letter was not attached to the Board's minutes.5
¶ 11. The record reflects that the Committee met in 2010, 2011, and 2012 and approved KPMG's proposal letters, without reference to any specific terms or conditions and without attaching the letters to the minutes. But unlike the previous two years, the Board failed to take any action concerning KPMG's letters for fiscal years 2010, 2011, or 2012. The Board's minutes reflect that the Board failed to discuss, review, or approve KPMG's proposals for those years. The Board's minutes are devoid of any evidence that Singing River contracted with KPMG to perform services, much less any terms or conditions of such a contract. The letters were neither referenced in, nor attached to, the Board's minutes from 2010 to 2012.
¶ 12. In fiscal year 2013, Singing River hired Horne, LLP, to conduct Singing River's annual audit. Horne informed Singing River that KPMG's prior audits had resulted in an eighty-eight million dollar ($88,000,000.00) overstatement of Singing River's accounts receivable.
¶ 13. On October 29, 2015, Singing River filed a complaint in Hinds County Circuit Court against KPMG, alleging separate counts of breach of contract and negligence and/or professional malpractice based on the audits KPMG performed for Singing River in fiscal years 2008 through 2012. Singing River alleged that KPMG failed to comply with the professional auditing and accounting standards expressed in GAAS (Generally Accepted Auditing Standards), GAGAS (Generally Accepted Government Auditing Standards), and GAAP (Generally Accepted Accounting Principles), which KPMG had agreed to follow. Singing River specifically alleged that KPMG's audits were replete with computational errors and incorrect assumptions, and that KPMG had not performed basic tests to substantiate...
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