For CAs in public practice, all too...

For CAs in public practice, all too ofttimes the relationships developed with clients extend far beyond that of providing service-more ofttimes than not, you become a trusted advisor, confidant, and actual much an ad hoc member of management upon major financial issues.

Unfortunately, today when businesses fail, too many former clients await to rationalize their loss as a failure forward the part of their professional advisors to defend them from their own decisions. The connections to the CAs I've delineateed in such situations are always severe-in denominations of time, stress, and enormous financial take away from to the accountant, their firm, and their insurer.

This is the story of the same CAs legal nightmare.

With my client's permission, I establish out below what happened to individual CA and his firm following a business failure. At issue were couple major transactions:

(1) The disposition of $15 million in life insurance springs receivable by "Second Company," $500000 of which was loaned to "First Company" (First Company was alleged to be insolvent); and

(2) The CA's recommendation to amalgamate the couple companies when First Company failed.

Of major importance here: the fact that the couple companies became heavily indebted to a lending company of which the CA was a director and minor shareholder. The action later brought alleged that the CA had breached his fiduciary what one ought to do to his clients in order to defend the lending's company's financial interests.

Prior to the lawsuit, which claimed damages well in exces of the insurance available, my client had to correspond to an investigation by the Institute's Professional escort Enquiry Committee (PCEC). Then, prior to trial, we wearied hundreds of hours reviewing more than 35000 documents; preparing for and attending examinations for discovery; preparing evidence for trial; and meeting with our clevers We then spent an entire month at trial, with our client and his partners entrusting their firm's reputation and financial well-being to sum of two units lawyers and a judge.

While the action was ultimately dismissed, the experience prov true costly for the CA. The lesson? The entire nightmare could have been avoided had he kept comprehensive documentation of his dealings with the plaintiffs.

Key points from the Trial Judge's findings

I propagate below edited excerpts of the facts as rest by the Trial Judge in his Reasons for Judgement delivered nine month after the trial. greatest in number of the names, places, and circumstances have been altered.

In July 1988 Jack Jone was the president of First Company Ltd ("First Company"). He applied to Industrial Lending Financial Corporation ("Industrial Lending") for a loan, the first of a number of loans to be made by means of Industrial Lending to First Company and later to the defendant, inferior Company Logging Co. Ltd. ("Second Company").

Mr Michael Stanford is a chartered accountant and has been a director of Industrial Lending since 1985 While he has a part in the ultimate approval of loans, he is not, however, involved in day-to-day matters or in the management of Industrial Lending. In mid-1989, Mr Stanford began to provide accounting services to First Company and in time also provided those services to inferior Company.

In early 1989, Mr Stanford was retained to prepare First Company's payroll, attend to its payables, and prepare its corporate tax get backs To facilitate their work, First Company gave joint signing authority above its bank accounts to Mr Stanford and a bookkeeper in Mr Stanford's office who also performed a cash grow management function whereby any exces stores in First Company's bank account were from time to time paid to Industrial Lending to bring interest charges on loans from Industrial Lending.

In early 1990 First Company's contract [with a major client] was coming to an period As a result, Mr. Jack Jone was seeking further opportunities. In June 1990 Mr Jone purchased secondary Company, having been advised of its availability through Mr. Stanford.

The purchase was financed at a loan from Industrial Lending in the amount of $1799792 inferior Company was required to obtain and assign to Industrial Lending a $15 million insurance policy onward the life of Mr. Jack Jones

In March 1991 Mr Jack Jone transferred all of his shares in First Company to his son who became the one director, officer, and shareholder of First Company. Despite the transfer, the evidence is clear that Mr Jack Jone remained effectively in direction of both companies from the standpoint of direction and decision-making.

In June 1992 First Company borrowed $500000 from Industrial Lending to deal with its indebtedness following the inactive period which followed the ending of its earlier contract.

Because of the growing demands of the pair companies, in May 1992 Mr Jack Jone hired James Lynch to assist him in running inferior Company and First Company. Mr Lynch was to work primarily in planning and upon the companies' contracts and sub-contracts. In January 1993 Mr Lynch became a director and the secretary of First Company and a director and the secretary of other Company in September 1993.