Victory for CPAs in litigation services.

In a case that spawned more than 11 years of litigation, a California appellate court has again reversed and remanded back to the trial court the Mattco Forge v. Ernst & Young case. This case began in September 1985 when Mattco sued General Electric, claiming GE's dismissal of Mattco as an approved subcontractor was racially motivated. In 1987, General Electric filed a counterclaim against Mattco, alleging Mattco had engaged in bid-rigging fraud while doing business with GE. General Electric also alleged that Mattco had fabricated documents with the assistance of its forensic accountant Arthur Young (now Ernst & Young).

In preparing for its 1985 racial discrimination suit, Mattco had hired the firm as damage consultant and expert witness to assist in Mattco's calculation of the profits lost because General Electric had struck Mattco from its supplier list. The accountant the firm assigned to the job, who had no training or experience in litigation services, reviewed Mattco's business documents, including 60 folders on the GE jobs. Finding 26 estimate sheets missing, the firm accountant asked Mattco (1) to create work-ups to reflect how it would have estimated costs on the jobs and (2) to prepare 26 new estimate documents. Those estimates were put into the job folders without indicating they were not the original business records. In response to GE's request, all 60 job folders, including the 26 recreated folders, were given to GE.

What must be proved?

Subsequently, General Electric and Mattco settled and mutually dismissed their respective lawsuits. However, Mattco then sued the firm for professional negligence, fraudulent misrepresentation and fraudulent concealment. After a series of judgments, appeals and remands, a jury awarded Mattco $42 million, including punitive damages. The trial court in this case ruled that Mattco was not required to established that, absent the firm's negligence, Mattco would have prevailed in the underlying case against GE. The firm appealed, arguing the trial court had erred in this ruling.

On appeal, the firm argued that Mattco had to meet the burden of a trial-within-a-trial. That is, Mattco had to prove it would have reached trial in the federal discrimination lawsuit and would have prevailed and obtained a judgment against General Electric. The trial court (in the case in which Mattco had won $42 million) had ruled that Mattco needed to show only that the firm had caused Mattco to suffer harm and, as regards damage, to prove merely that Mattco's case against General Electric had value.

CPAs' status similar to lawyers'

In ruling for the firm, the appellate court noted that the "trial-within-a-trial" burden of proof traditionally has applied only to legal malpractice cases. However, the court noted that in today's technologically driven litigation, engineers, physicians, real estate appraisers and many other professionals, including accountants, frequently are hired to assist a party in preparing and presenting a legal case. Often such professionals can play as great a role in the organization, shaping and evaluation of their client's case as do lawyers. As set forth, Mattco had alleged that the firm had provided negligent accounting litigation services, thereby ruining Mattco's federal lawsuit against General Electric. Thus, Mattco's cause of action is analogous to a legal malpractice case in which an attorney is accused of losing a plaintiff's case through negligence, and the same evidentiary burden applies. Consequently, to have prevailed against the firm, Mattco would have needed to establish that it would have won its case against GE if the firm had handled its engagement properly.

This is a significant case for the accounting profession for several different reasons:

* It is one of the few cases that opine on the standard of care for the growing accounting area of litigation services.

* It is also the first appellate case that adopts the "trial-within-a-trial" standard for determining accountants' malpractice.

* It rejects the less stringent burden of proof adopted by the trial court.

As such, it is a victory for the accounting profession in general and accountants performing litigation services in particular.