Lincoln Grain, Inc. v. Coopers & Lybrand

• Citation: 338 N.W.2d 594,215 Neb. 289
• Decision Date: 23 September 1983
• Docket Number: No. 82-473,82-473
• Parties: LINCOLN GRAIN, INC., a Kansas corporation, Appellant, v. COOPERS & LYBRAND, a partnership, Appellee.
• Court: Supreme Court of Nebraska

Page 594

338 N.W.2d 594

215 Neb. 289

LINCOLN GRAIN, INC., a Kansas corporation, Appellant, v. COOPERS & LYBRAND, a partnership, Appellee.

No. 82-473.

Supreme Court of Nebraska.

Sept. 23, 1983.

Syllabus by the Court

Limitations of Actions: Negligence. In order for a continuous relationship to toll the statute of limitations regarding a claim for malpractice, there must be a continuity of the relationship and services for the same or related subject matter after the alleged professional negligence.

Karen B. Flowers, of Bauer, Galter & Geier, Lincoln, for appellant.

Maureen E. McGrath of Kutak, Rock & Huie, Omaha, and Joseph A. Clark III, of Coopers & Lybrand, New York City, for appellee.

KRIVOSHA, C.J., and BOSLAUGH, McCOWN, WHITE, HASTINGS, CAPORALE, and SHANAHAN, JJ.

SHANAHAN, Justice.

On February 24, 1977, Lincoln Grain, Inc. (Lincoln), sued its accountants, Coopers & Lybrand (C & L), for malpractice in rendering audits for fiscal periods ending in 1973, 1974, and 1975. In a trial pursuant to Neb.Rev.Stat. § 25-221 (Reissue 1979), the District Court held that the 2-year statute of limitations of Neb.Rev.Stat. § 25-222 (Reissue 1979) barred Lincoln's claims against C & L regarding 1973 and 1974, and dismissed Lincoln's action for those years. The District Court also concluded that any cause of action for 1975's audit was filed within time. Lincoln has appealed from the trial court's order of dismissal. We affirm.

Lincoln, through its Des Moines office called the "Iowa division," dealt in grain contracts. The Iowa division was a "track office"--an operation for buying grain on contract and selling the contracted grain to processors and exporters. A track office has no physical inventory of grain and never takes possession of the contracted grain.

All original contracts of the Iowa division were kept in Des Moines. Each contract was numbered and indicated the customer, date of shipment, quantity of grain under contract, destination, freight rate, and market price of the grain. At the end of each month the manager of the Iowa division prepared a list of "open contracts"--transactions where grain had not been settled by delivery and payment as contracted. By this list Lincoln determined whether there was a gain or loss on its contracts, and the result of such computation constituted the "inventory" of the Iowa division. Each of Lincoln's divisions sent its financial statement to Lincoln's main office. These financial statements were then combined into a "yearend" consolidated financial report called a consolidated statement. A consolidated statement reflected only the inventories at the end of the last month of a period to be audited. Lincoln gave its consolidated financial statement to outside auditors, because Lincoln did not have any "internal audit staff." Accountants then conducted an audit based on the consolidated financial statement supplied by Lincoln. For each audit Lincoln's officers also supplied a certification of the divisions' inventories existing on the last day of the period to be audited.

In 1970 Lincoln contacted C & L regarding an audit in 1971. Before any audit was undertaken, C & L required an "engagement letter" which defined the "scope of the audit"--the nature and extent of the work to be done, including validation of information contained in the financial statement supplied by Lincoln, and the amount of the fee for the services to be rendered by the accountant. Without a letter of engagement C & L would not be retained for an audit. Pursuant to separate engagement letters, C & L was hired for audits from 1971 to 1975. During that time and based on information supplied by Lincoln, C & L audited fiscal periods ending on March 31 and June 30 in 1973 and on June 30 in 1974 and 1975, respectively. C & L delivered to Lincoln a written report regarding each of the three audits before 1975, namely, a report delivered on June 29, 1973, for the period ending March 31, 1973; on October 23, 1973, for the period ending June 30, 1973; and on September 27, 1974, for the period ending June 30, 1974.

Late in 1975 Lincoln knew there was some problem involving its Iowa division. Lincoln learned in January 1976 that the financial statements from the Iowa division were inaccurate. In early February 1976 Lincoln estimated its loss from the Iowa division to be at least $432,000. In his letter of resignation on February 6, the manager of the Iowa division acknowledged that the financial reports which he had submitted were inaccurate. On February 18 the treasurer of Lincoln wrote C & L that there was an "overstatement" of the Iowa division's inventory.

In March 1976 Lincoln sent two employees--Ardean Arndt, Lincoln's secretary, and Loyal Steube, a company accountant--to Des Moines to ascertain the reasons behind the inaccurate financial reports from the Iowa division. Lincoln's employees found out that the manager of the Iowa division had altered and misrepresented the number of bushels on the list of open contracts reported to Lincoln and had used the most favorable market price available rather than the true market price applicable to the open contract. In this manner the inventory had been "overstated" and the value of grain subject to contract had been inflated. Lincoln compared the original contracts with the list of open contracts and contacted some buyers for confirmation and validation of the transactions indicated by the contracts. Personnel from Lincoln and C & L attempted to determine the exact extent of the loss attributable to the Iowa division.

Lincoln filed suit on February 24, 1977, and alleged that C & L had not followed proper accounting procedures; that C & L's validation and testing procedure for inventories failed to disclose the distortions and overstatement by the manager of the Iowa division; that such distortion and overstatement misrepresented that the Iowa division was operating at a profit, whereas there were substantial losses during the periods audited; and that proper accounting methods and validation of the inventory would have disclosed the losses in sufficient time to rectify the situation without any further loss. To summarize and paraphrase Lincoln's allegations, C & L was negligent in failing to discover and report the misrepresentations regarding operations of the Iowa division.

At the trial on the question of the statute of limitations, Lincoln called an expert witness, Gerald Grant, a certified public accountant. Grant testified that a "continuous engagement" was a "formal engagement for which an auditor is engaged for several fiscal years in a single contract," but acknowledged there was no documentation that C & L's accounting relationship with Lincoln was for more than 1 year. Also, Grant testified that nothing in the relationship indicated the "engagement was other than" for the particular fiscal year designated and that there was a separate report for each of the audited periods. Grant admitted that each report "would stand on its own" and that delivery of the report ends the auditor's work on the fiscal year audited. According to Grant, an auditor has no obligation to make any further inquiry or to perform any additional...