Downtown Cincinnati CPA Firm Targeted by McCluskey Chevrolet: GM Dealer Claims Accountants Didn't Uncover $6 Million Scam

GM Dealer Says CPAs Missed Hands in Cookie Jar

CINCINNATI (TDB) -- The latest chapter in the scandal unfolding over an alleged $6 million embezzlement scandal at the GM dealership is another lawsuit.  This one  accuses a respected accounting firm of professional malpractice for failing to spot hands in the cookie jar.  McCluskey Chevrolet Inc. lawyer David Eberley filed the suit last month.  Hamilton County Common Pleas Court records show  J.D. Cloud & Co. LLP has counsel retained to fight the auto dealer's case but has not yet filed a formal response disputing the charges.  The lawsuit is assigned to Judge Beth Myers, who has set a case management conference for March 2.  Boiled down, the dealership's lawsuit appears to center on whether the accountants  rode the audit trail hard enough earlier this decade.  On the other hand, there are contracts that did not guarantee illegal activity would be discovered.  The accounting contracts can be interpreted to say the CPA work did not come with an "absolute assurance" every issue would be detected.


McCluskey Chevrolet says it retained J.D. Cloud in November 2005 for accounting services that included preparing tax returns, reviewing balance sheets, and ensuring that its 401(k) plan complied with federal reporting standards.  The car dealer says the CPAs were "obligated to exercise reasonable professional care" that should have exposed any scheme to steal company funds.   McCluskey contends a former payroll clerk ran a $6 million operation that involved distributing payroll checks to dealership employees who would kick back some of the extra funds to the payroll clerk.   McCluskey says the scheme was perpetrated during some of the years -- 2005 through 2008 -- the CPAs were performing accounting and auditing services.  McCluskey said it found out about the embezzlement last September.

"In fact, per the American Institute of CPAs' Accounting and Audit Guide for Employee Benefit Plans, as well as PPC Audit Program for Participant Data and Employee Contributions (Guidelines) Defendant in performing audit and other services, was required to take certain specific steps:
   a.  Defendant was required to test the clerical accuracy of the empoloyer's payroll journal and any schedule of data associated with 401(k) participant data used in that audit area, including through reconciling gross pay amounts from the payroll journal to the participant data used by the third party administrator and to total compensation reflected on the W-3 tax form.
   b. Then, Defendant was required to trace gross salary or wages to and from the payroll journal and participant records, trace relevant demographic data (such as birth dates, hire dates, etc.) to personnel files, and tie out gross pay to amounts reported on W-2 forms for individual employees,  There are important steps -- gross pay is usually the basis for participant and employer contributions in a 401(k) plan."


Contracts with J.D. Cloud are included as exhibits in the lawsuit.  They likely will become major factors as the legal dispute focuses on determining exactly what the CPAs were required to do, and what they were expected find while examining financial records at the Chevrolet dealership.  A Dec. 7, 2005 contract seems to indicate that J.D. Cloud has a defense. Per an excerpt from one of the two CPA contracts:

 "Our engagement cannot be relied up to disclose errors, fraud or illegal acts that may exists.  However, we will inform you of any material errors that come to our attention and any fraud or illegal acts that come to out (sic) attention, unless they are clear inconsequential,  In addition, we have no responsibility to identify and communicate significant deficiencies or material weaknesses in your internal control as part of this engagement.  We will not perform an audit of such financial statements, the objective of which is the expression of an opinion regarding the financial statements taken as a whole, and accordingly we will not express such an opinion on them . . .


"You are responsible for management decisions and functions, and for designating a competent employee to oversee any bookkeeping services, tax services, or other services we provide.  You are responsible for evaluating the adequacy and the results of the services performed and accepting responsibility for such services.  You are responsible for establishing and maintaining internal controls, including monitoring ongoing activities."