Accountant Errors FAQ

Accountant negligence in California occurs when a Certified Public Accountant (CPA), tax preparer, or other accounting professional fails to exercise the degree of care, skill, and competence that reasonably competent accountants would exercise under similar circumstances, resulting in financial harm to the client. Under California Business and Professions Code Section 5100, the California Board of Accountancy regulates CPAs and can take disciplinary action for negligence, incompetence, or unprofessional conduct.

To establish an accountant malpractice claim, you must prove four elements: the existence of a professional relationship creating a duty of care, breach of that duty by failing to meet professional standards, causation linking the breach to your damages, and actual financial losses. Professional standards for accountants include Generally Accepted Accounting Principles (GAAP) for financial reporting, Generally Accepted Auditing Standards (GAAS) for audit work, and applicable IRS regulations and California tax codes for tax preparation. Common examples of accountant negligence include errors in tax return preparation, failure to identify fraud during audits, misstatement of financial records, failure to advise on tax-saving strategies, and breach of confidentiality obligations.

Yes, you can sue your tax preparer for mistakes on your tax return in California if their errors caused you financial harm. Tax preparers, whether CPAs, enrolled agents, or unlicensed preparers, owe a duty of care to their clients to prepare accurate returns in accordance with applicable tax laws. Under California Business and Professions Code Section 22253, tax preparers must register with the California Tax Education Council (CTEC) unless they are CPAs, attorneys, or enrolled agents.

Common tax preparer errors that may give rise to claims include incorrectly reporting income or deductions, failing to claim available credits or deductions, mathematical errors, missing filing deadlines, providing incorrect tax advice, and failing to properly represent clients during IRS audits. To succeed in your claim, you must demonstrate that the preparer's error fell below the applicable standard of care, that you relied on the preparer's work, and that you suffered quantifiable damages such as additional taxes owed, penalties, interest, fees for corrective filings, or costs of defending against an IRS audit. You should also be aware that contributory negligence may apply if you provided inaccurate information to your preparer.

California applies a two-year statute of limitations to accountant malpractice claims under Code of Civil Procedure Section 339, which governs professional negligence actions based on oral agreements, or four years under Section 337 for written engagement agreements. However, the discovery rule significantly impacts when the limitations period begins to run.

Under the discovery rule, the statute of limitations does not begin until you discover, or through reasonable diligence should have discovered, the accountant's negligent act and resulting injury. For example, if an accountant made an error on your 2020 tax return that wasn't discovered until an IRS audit in 2023, the statute would begin running from the 2023 discovery date. California courts have held that mere suspicion of wrongdoing is insufficient to trigger the limitations period—you must have actual notice or constructive notice of facts that would put a reasonable person on inquiry. Additionally, if the accountant fraudulently concealed their negligence, the statute may be tolled under the doctrine of fraudulent concealment. Given these complexities, consulting with an attorney promptly upon discovering potential accountant negligence is essential to preserve your rights.

Damages recoverable in a California accountant malpractice case are designed to compensate you for all financial losses proximately caused by the accountant's negligence. Economic damages include additional taxes you were required to pay due to errors, IRS and California Franchise Tax Board penalties and interest, costs of hiring another professional to correct the errors, fees paid to the negligent accountant for deficient services, legal fees incurred defending against IRS or state tax agency actions, and lost business opportunities or investment returns resulting from the negligence.

For auditing negligence, damages may include losses suffered by relying on inaccurate financial statements, such as investment losses or fraudulent business dealings that proper auditing would have uncovered. California law requires that damages be proven with reasonable certainty—speculative losses are not recoverable. Punitive damages may be available in cases involving fraud, malice, or oppression under California Civil Code Section 3294, such as when an accountant intentionally misrepresented financial information. Emotional distress damages are generally not available in accountant malpractice cases unless accompanied by physical injury or the conduct was particularly egregious.

Filing a complaint against a CPA with the California Board of Accountancy (CBA) initiates a regulatory investigation separate from any civil malpractice lawsuit. Under California Business and Professions Code Sections 5100-5110, the CBA has authority to investigate complaints and impose discipline ranging from citations and fines to license revocation. To file a complaint, you can submit it online through the CBA website or mail a written complaint to the Board's Sacramento office.

Your complaint should include: the CPA's name and license number, a detailed description of the alleged misconduct, dates of the events, copies of relevant documents such as engagement letters, tax returns, financial statements, or correspondence, and information about any financial harm you suffered. The CBA's Enforcement Division will review your complaint and determine whether to open a formal investigation. If the investigation reveals violations, the case may be referred to the Attorney General's office for disciplinary proceedings. Possible outcomes include dismissal if no violation is found, a citation with fine, probation, license suspension, or license revocation. It's important to understand that the CBA process does not provide monetary compensation to complainants—for that, you must pursue a civil lawsuit.

California CPAs are bound by multiple overlapping professional standards that define the expected level of care and competence. The California Accountancy Act, codified in Business and Professions Code Sections 5000-5158, establishes the licensing requirements and prohibited conduct for CPAs in California. The California Board of Accountancy Regulations (Title 16, California Code of Regulations) provide detailed rules on professional conduct, including requirements for independence, confidentiality, and competence.

At the national level, CPAs must follow Generally Accepted Accounting Principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB) for financial reporting engagements, and Generally Accepted Auditing Standards (GAAS) issued by the American Institute of CPAs (AICPA) for audit and attestation services. The AICPA Code of Professional Conduct sets ethical standards including integrity, objectivity, due care, and independence. For tax practice, CPAs must comply with IRS Circular 230 regulations governing practice before the IRS and California's tax preparer regulations. Statements on Standards for Tax Services (SSTS) provide guidance on tax return positions and client advice. Violation of any of these standards may constitute evidence of negligence in a malpractice case, as these standards define the care expected of competent professionals.

Yes, accounting firms in California can be held vicariously liable for the negligent acts of their employees under the doctrine of respondeat superior, which makes employers responsible for wrongful acts committed by employees within the scope of their employment. Under California Civil Code Section 2338, a principal is liable for the negligent acts of an agent acting within the scope of agency. When you engage an accounting firm, the firm typically assumes responsibility for the work performed by its staff, whether partners, managers, or junior accountants.

The engagement letter usually establishes the contractual relationship with the firm rather than individual accountants. Firms can also be held directly liable for their own negligence in supervision, training, or quality control. Professional standards require accounting firms to maintain quality control systems including supervision of staff work, continuing professional education, and peer review programs. If a firm fails to properly supervise employees or maintain adequate quality controls, the firm itself may be negligent independent of any individual employee's conduct. In partnership structures common among accounting firms, partners may have personal liability for firm obligations under the California Revised Uniform Partnership Act, though many firms now operate as LLPs or professional corporations that limit partner personal liability.

If you discover your accountant made errors on your financial statements, taking prompt action is essential to protect your interests and preserve your legal rights. First, document everything by gathering all records related to the engagement including the engagement letter, all financial statements and work papers, correspondence with the accountant, and records of fees paid. Note when you discovered the errors and how you discovered them. Second, do not destroy any documents, even if they seem unfavorable, as they may be needed for litigation or regulatory proceedings.

Third, consider having another qualified CPA review the work to identify all errors and assess their impact on your financial position, tax obligations, and any third parties who relied on the statements. Fourth, notify affected parties if the erroneous financial statements were provided to lenders, investors, or business partners, as you may have obligations to correct misrepresentations. Fifth, consult with a legal professional experienced in accountant malpractice to evaluate your potential claims before the statute of limitations expires. Sixth, consider filing a complaint with the California Board of Accountancy. Finally, if the errors affected your tax returns, you may need to file amended returns with the IRS and California Franchise Tax Board to minimize penalties and interest.

The cost of pursuing an accountant malpractice case in California varies based on case complexity, but several factors are common to most cases. Unlike some personal injury cases, accountant malpractice cases are often handled on an hourly fee basis rather than contingency because they require intensive document review and expert testimony. Hourly rates for attorneys experienced in professional malpractice litigation typically range from $300 to $600 per hour in California.

Some attorneys may accept accountant malpractice cases on contingency, usually charging 33% to 40% of recovery, particularly for cases with clear liability and substantial damages. Expert witness fees are a significant expense, as you will need forensic accountants to review the work product, identify errors, and testify about professional standards. Expert fees can range from $10,000 to $50,000 or more depending on case complexity. Additional costs include court filing fees, deposition costs, document production and organization, and potentially the cost of repairing damage caused by the negligent accounting such as filing amended tax returns or restating financial statements. Before pursuing a claim, conduct a cost-benefit analysis considering the potential recovery versus litigation costs, and discuss fee arrangements thoroughly with prospective attorneys.

Accountant negligence and accountant fraud are distinct legal concepts with different elements, burdens of proof, and potential remedies under California law. Negligence occurs when an accountant fails to exercise the degree of care and skill that a reasonably competent accountant would exercise, causing unintentional harm to the client. The standard is objective—whether the accountant's conduct fell below professional standards—and does not require proof of intent. Examples include mathematical errors, overlooking available deductions, or misapplying accounting rules.

Fraud, in contrast, requires proof of intentional misconduct. Under California Civil Code Section 1709, fraud requires showing the accountant made a false representation of material fact, knew the representation was false or made it recklessly without regard for truth, intended to induce reliance, the client justifiably relied on the misrepresentation, and suffered resulting damages. Fraud claims must be proven by clear and convincing evidence, a higher standard than the preponderance of evidence required for negligence. The practical differences are significant: fraud claims may support punitive damages under Civil Code Section 3294, longer statutes of limitations may apply, and fraud can give rise to criminal prosecution under California Penal Code provisions. Fraud may also void limitation of liability clauses that might otherwise protect accountants in negligence cases.