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Epic v. CliftonLarsonAllen LLP

Court of Appeals of Washington, Division 3

June 20, 2017

EPIC, a non-profit corporation, Appellant,
CLIFTONLARSONALLEN LLP, a limited liability partnership, and RALPH CONNER, an individual, Respondents.

          Fearing, CJ.

         Is an auditor engagement agreement provision, which imposes a deadline for filing suit, against the auditor, within two years from the date of the last audit report, a reasonable and enforceable stipulation when the auditor's client had one year to file suit after it should have discovered any breach of duty by the auditor and any resulting damages? Plaintiff Enterprise and Progress in the Community (EPIC) appeals from a summary judgment dismissal of its suit against its former auditing firm, CliftonLarsonAllen LLP (CLA), for negligence and breach of contract. We hold the contractual provision to be reasonable under the circumstances and affirm the trial court's dismissal of the suit.


         Plaintiff EPIC, a nonprofit corporation, operates a Head Start program funded by the United States Department of Health and Human Services Administration for Children and Families (HHS). Defendant CLA is the successor to EPIC's former auditing firms, Lemaster & Daniels PLLC and LarsonAllen LLP. This statement of facts will refer to all iterations of the auditing firm as CLA.

         From 2006-2011, EPIC entered annual engagement agreements with CLA to audit EPIC's financial statements and determine whether EPIC complied with federal grant regulations. Each engagement agreement contained clauses that required EPIC to commence any legal action arising from the audits within two years. The limitations clause pertaining to the 2006-2009 audits stated:

It is agreed by Client [EPIC] and [Lemaster & Daniels PLLC] [CLA] or any successors in interest that no claim arising out of services rendered pursuant to this agreement by or on behalf of Client shall be asserted more than two years after the date of the last audit report issued by [Lemaster & Daniels PLLC].

Clerk's Papers (CP) at 38, 44, 52, 57 (emphasis added). The limitation clauses in the 2010-2011 audit agreements declared:

Time limitation
The nature of our services makes it difficult, with the passage of time, to gather and present evidence that fully and fairly establishes the facts underlying any Dispute. We both agree that, notwithstanding any statute or law of limitations that might otherwise apply to a Dispute, any action or legal proceeding by you against us must be commenced within twenty-four (24) months ('Limitations Period') after the date when we deliver our final audit report under this agreement, regardless of whether we do other services for you relating to the audit report, or you shall be forever barred from commencing a lawsuit or obtaining any legal or equitable relief or recovery.
The Limitation Period applies and begins to run even if you have not suffered any damage or loss, or have not become aware of the existence or possible existence of a Dispute.

CP at 70, 79 (emphasis added). All engagement agreements defined "dispute" as "[a]ny disagreement, controversy, or claim that may arise out of any aspect of our services or relationship with you." CP at 70, 79.

         Pursuant to the agreements, CLA delivered the following audit reports to EPIC on the following dates:

2006audit report

May 22, 2007

2007audit report

March 17, 2008

2008audit report

June 29, 2009

2009audit report

May 18, 2010

2010audit report

March 28, 2011

2011 audit report

September 19, 2012

2012audit report

June 25, 2013

CLA last prepared an audit for EPIC for the 2012 year. We do not know if EPIC s financial year was the same as the calendar year.

         On January 17, 2012, HHS notified EPIC that EPIC violated federal regulations by using 2011 grant money to pay expenses for another year. The disbursements reported to HHS by EPIC for 2011 exceeded the disbursements reflected in EPIC's internal accounting records. Under federal regulations, a Head Start recipient must expend grant money received on obligations incurred during the funding period to the award, rather than accumulate the money for later payments. Among other untimely payment of bills, EPIC, in January 2011, wrote a check to one vendor but did not deliver the check to the vendor until June because of a cash flow problem. The notification directed EPIC to correct its violation of the HHS regulation within ninety days or such additional time, up to one year, as approved by an HHS official.

         Shortly after receiving HHS's notice EPIC confirmed that Walter Abegglen, EPIC's chief financial officer, used grant funds from one grant year to pay expenses incurred in a different grant year. EPIC contends that Abegglen lacked knowledge that the delayed expenditures breached HHS rules. Abegglen claimed that he moved "money around just so accounts balanced." CP at 169. In February 2012, EPIC fired Abegglen due to his inability to lawfully manage Head Start funds.

         After terminating Walter Abegglen's employment, EPIC's Executive Director Gary Hudson tasked EPIC's controller to investigate the rule violations alleged by HHS. EPIC's controller learned that Abegglen charged expenses incurred in the last quarter of one year to the first quarter of the next year.

         Shortly after receiving the January 2012 notice EPIC began experiencing costs to address the financial problems associated with the misuse of HHS grant funds and the prospect of HHS demanding repayment of misused funds. In April 2012, EPIC borrowed $620, 000 in anticipation of repayment.

         On September 19, 2012, CLA delivered the 2011 audit report to EPIC. The 2011 report identified the misuse of grant funds alleged by HHS and warned that the misuse started at least by the 2009 grant year. Note 12 in the 2011 audit report states:

Net assets at the beginning of 2011 have been adjusted to properly reflect cash receipts on accounts receivable for prior years and to match grant expenditures without reimbursements applicable to prior years. The adjustment resulted in a decrease in net assets and an increase in accrued expenses of $331, 095. The effect of the restatement on the previously reported change in net assets for the year ended December 31, 2010 has not been determined.

CP at 111. The audit report also read:

As described in items 2011-01, 2011-02, and 2011-03 in the accompanying schedule of findings and questioned costs, EPIC did not comply with requirements regarding cash management and period of availability of federal funds that are applicable to its Head Start Cluster. Compliance with such requirements is necessary, in our opinion, for EPIC to comply with the requirements applicable to that program.

CP at 115. CLA further described the misuse of grant funds in the audit's Finding 2011- 02 that stated:

Condition: EPIC drew down funds from current Head Start grants for expenditures incurred in previous grant years.
Questioned Costs:
$448, 885 related to November 1, 2010 through October 31, ...

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