I
STATE OF MICHIGAN
CIRCUIT COURT FOR THE COUNTY OF MONTCALM COUNTY OF MONTCALM, Plaintiff, Case No. 20 I 8-q.13?01-NM
Hon'
ABRAHAM & GAFFNEY, P.L., DALE ABRAHAM, MICHAEL GAFFNEY, ERIC GLASHOUWER, STEVEN KIRINOVIC, ALAN PANTER, AARON STEVENS, and WILLIAM TUCKER ry,
fl1;vttd
Il. $rrrfrr
Defendants-
Clark Hill PLC Peter Kupelian (P3 1812) Linda Watson (P45320) Mariah Mumford (P7 99 45) l5l S. Old Woodward Ave., Suite 200 Birmingham, MI 48009 (248) 642-9692 pkupelian arkhill.com lwatson@clarkhill.com mmumford@clarkhill. com Counsel for Plaintiff
There is no olher pending or resolved civil action arising oul of the same transaction or occarrence alleged in the Complaint.
COMPLAINT AND JURY DEMAND Plaintiff, County of Montcalm ("Montcalm"), by and through its attorneys, Clark Hill PLC, states for its Complaint against Abraham & Gaffney, P.C. ("Abraham & Gaffney"), Dale Abraham ("Abraham"), Michael Gaffrrey ("Gafftrey"), Eric Glashouwer ("Glashouwer"), Steven
Kirinovic ("Kirinovic"), Alan Panter ("Panter"), Aaron Stevens ("Stevens"), and William Tucker
IV ("Tucker") (collectively, "Defendants")
2t6843583.2 43588/312697
as follows:
I
JURISDICTION ATID VENUE
l.
Montcalm is an organized county located in the State of Michigan.
2.
Montcalm is a body politic and corporate under Michigan [aw.
3.
The chief policy-making and legislative body of Montcalm is the Montcalm
County Board of Commissioners ("Board of Commissionen").
4.
The Board of Commissioners conducts all of its legislative and offrcial actions in
Stanton, County of Montcalm, State of Michigan.
5.
Abraham
6.
Abraham & Gafftrey's registered office is located in St. Johns, County ofClinton,
& Gaffney is a Michigan domestic professional corporation.
State of Michigan.
7.
Upon information and belief, Abraham is a resident of St. Johns, County of
Clinton, State of Michigan.
8.
Upon information and belief, Abraham is a certified public accountant and is a
shareholder/principal of Abraham & Gafkrey.
9.
Upon information and belief, Gaffrrey is a resident of Marysville, County of Saint
Clair, State of Michigan.
10.
Upon information and belief, Gaftrey is a certified public accountant and was a
shareholder/principal ofAbraham 1
1.
& Gaffirey
as recent as June 2, 2017.
Upon information and belief, Glashouwer is a resident of Dewitt, County of
Clinton, State of Michigan.
12.
Upon information and belief, Clashouwer is a certified public accountant and is a
shareholder/principal of Abraham & Gaffrrey.
2 2r 6843583.2 43588/112697
13.
Upon information and beliet Kirinovic is a resident of Dewitt, County of Clinton,
State of Michigan.
14.
Upon information and belief, Kirinovic is a certified public accountant and was a
shareholder/principal of Abraham
15.
& Gaffney
as recent as June
2,2017.
Upon information and belief, Panter is a resident of East Lansing, County of
Ingham, State of Michigan.
16.
Upon information and beliet Panter is a certified public accountant and was a
shareholder/principal ofAbraham & Gafftrey as recent as June 2, 2017.
17.
Upon information and belief Stevens is a resident of Dewitt, County of Clinton,
State of Michigan.
18.
Upon information and belief, Stevens is a certified public accountant and was a
shareholder/principal of Abraham
19.
& Gaffney
as recent as June 2, 2017.
Upon information and belief, Tucker is a resident of East Lansing, County of
Clinton, State of Michigan.
20.
Upon information and belief, Tucker is a certified public accountant and was a
shareholder/principal of Abraham & Gaffrrey as recent as June 2, 2017.
21.
Venue in this forum is proper because the injuries complained of herein occurred
substantially in Montcalm County, State of Michigan.
22.
Venue in this forum is also proper because the Defendants conduct substantial
business, including accounting and auditing services, in Montcalm County, State of Michigan.
23.
The amount in controversy exceeds $25,000 exclusive ofinterest and costs.
3 216843583.2 43588/312697
NATURE OF THE ACTION
24.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
25.
In about 1996, Montcalm retained Abrahams & Gaffrrey to act as its independent
herein.
auditing firm.
26.
Montcalm continued to engage Abrahams & Gaffrrey as its independent auditing
firm until 2016. 27
.
As the independent auditing firm, Abrahams & Gaffirey was required to audit
Montcalm's Financial Statements each year and it also provided accounting services from time to time in relation to the audits.
28.
Abraham, Gaffney, Glashouwer, Kirinovic, Panter, Stevens, and Tucker as the
shareholders/principals of Abrahams
&
Gaffrrey performed auditing and accounting services for
Montcalm or, as the shareholders/principals of Abrahams
& Gaffney, they oversaw
and were
indirectly or directly liable and responsible for all auditing and accounting services performed by their employees for Montcalm.
29.
This action is a direct result of the Defendants' failure to perform their auditing
duties in accordance with their professional responsibilities and obligations to Montcalm.
30.
This action also stems from the Defendants' casual and overly familiar and close
relationship with Montcalm's former Controller-Administrator, Chris Hyzer ("Hyzer"). Hyzer was once an employee of Abrahams
31.
& Gaffrrey before his employment with Montcalm.
Specifically, in conducting its annual audits of Montcalm's Financial Statements,
the Defendants failed to comply with the appropriate accounting and auditing standards, failed to
4 2 t 6843
583.2 43588 t 3 t 2697
properly review Montcalm's books, ledgers, and records, and acted with such reckless disregard
of its responsibilities that their actions essentially amounted to no audits at all.
32.
To make matters worse, year-after-year, the Defendants failed to present
and
communicate their opinions and the results ofthe audit to the Board of Commissioners.
33.
Since the Defendants held themselves out
to
Montcalm as auditing
and
accounting experts, Montcalm relied upon the Defendants to perform a thorough and complete audit each year.
34.
Since the Defendans held themselves out
to
Montcalm as auditing and
accounting experts, Montcalm also relied upon the Defendants to inform
it when Montcalm's
spending severely outweighed its revenue.
35.
However, the Defendants failed to conduct their audits in accordance with the
standards ofcare in their profession.
36.
Likewise, the Defendants failed
to inform
Montcalm and the Board of
Commissioners that, due to internal accounting misconduct in practices and policies, Montcalm was inching closer to financial insolvency. 37
.
Rather, the Defendants appear
to have merely
rubber-stamped Montcalm's
Financial Statements due to their close and friendly relationship with Hyzer.
38. a number
As a result of their reckless conduct, the Defendants failed to discover and report
of major accounting issues and accounting and budgeting misconduct to the Board of
Commissioners.
39.
Since none of the Board of Commissioners were certified public accountants,
Montcalm and the Board of Commissioners relied upon the Defendants to alert them to any
5 2 t
6843583.2 43588/3 t2697
errors, omissions and inaccuracies in the Financial Statements, as well as any misconduct or misleading representations.
40.
Since none of the Board of Commissioners were certified public accountants,
Montcalm and the Board of Commissioners relied upon the Defendants to alert them to any inappropriate accounting practices of Hyzer.
41.
Although the Financial Statements were filled with errors, omissions
inaccuracies, as
and
well as misleading representations, the Defendants, nevertheless, continued to
issue Reports that validated the Financial Statements and Hyzer's practices and never met with the Board of Commissioners.
42.
The Defendants' egregious conduct has resulted in a number
of injuries
to
Montcalm, including, but not limited to:
a.
The
b.
The closing down of the Animal Control Unit due to a lack of funding;
c.
Being forced to staff its county parks and recreational unit with volunteers due to
lalng-offa significant
a lack
d.
number ofemployees due to a lack of firnding;
of funding;
Being forced to stop all conferences and travel for its employees due to a lack of tunding;
e.
Being forced to lose a number of programs due to a lack of funding;
f.
Being forced
to
eliminate
or
indefinitely suspended necessary
capital
improvements due to a lack of funding; and
g.
Being forced to spend large sums of money to investigate the cause of these accounting issues and address them.
6 2 | 6843 583.2 43 588/3 12697
GENERAL ALLEGATIONS Board of Commissioners
43.
Montcalm hereby incorporates the preced:ing paragraphs as though fully set forth
44.
The Board of Commissioners is an elected nine (9) member legislative body,
herein.
which acts on behalfMontcalm.
45.
The Board of Commissioners is responsible for authorizing the budget each year
and also serves in an oversight function.
46. assesses
The Board of Commissioners investigates the affairs of Montcalm's agencies,
the agencies' performance and, through the adoption of resolutions, provides new
policy, direction, and assistance in solving problems. 47
.
The Board of Commissioners also sets the county tax rate, within its own rate
limitations, approves grant applications, receives grant money, sets many ofthe fees collected by county departments, receives state and federal revenue sharing money, and borrows money for several purposes.
48.
During the relevant time period, none ofthe commissioners elected to the Board
of Commissioners were certified public accountants.
Montcalm's Retention of Abraham & Gaffnev
49.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
50.
Upon information and belief, Abraham & Gafftrey was established by Abraham
herein.
and Gaffney in or around 1991
.
7 2 t 6843 583.2 43 588t3
t2691
51.
Abraham
&
Gaffney held and continues to hold itself out to the public
as
providing financial, tax, accounting services, and audit services.
52.
In or around 1996, Montcalm began to engage Abraham
Independent Auditor Reports ("Reports")
of
&
Gafhrey to prepare
Montcalm's Financial Statements and some
accounting services.
53.
The Reports are designed to serve as assurance of the accuracy of Montcalm's
Financial Statements and the Controller's work in preparing those statements, among other things.
54.
The Reports are also mandated by Michigan law.
55.
From 1996 until 2016, Montcalm retained, by various agreements, the services of
Abraham
& Gaftrey to audit Montcalm's Financial
Statements and prepare the annual Reports
and provide other necessary accounting services.
56.
Throughout its engagement, the Defendants represented that they had a high level
of experience in providing accounting and auditing services and that they were qualified to perform all the necessary services for Montcalm in an independent manner and in compliance with the applicable legal and professional standards.
57.
Defendants were required
at all times to be
independent and
to
maintain
objectivity and be fiee of conflicts of interest in discharging professional responsibilities. This requires a continuous assessment
ofclient relationships
and public responsibility by the auditors
and they should be independent in fact and appearance.
58.
During the relevant time period, the Defendants issued independent auditor's
reports, which represented that appropriate accounting policies were being used and that there
8 2r6843583.2 43588/3 12697
were, among other things, reasonable accounting policies and estimates being made by management and proper overall presentation
59.
offinancial statements.
However, as discussed herein, once their former employee, Hyzer, was placed as
the controller at Montcalm, Defendants appear to have lost independence and placed their relationship with Hyzer ahead of their duties to Montcalm. In doing so, they failed to disclose new and critical issues with Hyzer's accounting estimates, policies, work product and failed to
disclose that the Financial Statements were becoming littered with misstated transactions, misstated balances, and other errors and omissions.
Chris Hvzer
60.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
61.
Hyzer previously worked as a senior auditor for Abraham
herein.
& Gafftey.
Upon
information and belief, he was not a certified public accountant and was staffed on the Montcalm audit team while an employee at Abraham & Gaffney.
62.
ln about 2007, Hyzer was hired as the Controller-Administrator for Montcalm.
63.
In his role as Controller-Administrator of Montcalm, Hyzer was required
to
maintain and oversee all of Montcalm's accounting and financial management systems.
64.
Hyzer was also hired to carry out directives from the Board of Commissioners
regarding personnel and employee relations, budgeting, grant funding, and other areas
as
directed. Hyzer was also responsible for all entries in Montcalm's general ledger.
65.
Further, as Controller-Administrator, Hyzer was required to prepare the annual
county budget, monitor all county financial information, and make recommendations on funding
levels for departmental budgetary requests. Hyzer was also required
9 2
t6843583.2 43588/3 r2697
to
coordinate the
independent auditing services. Most notably, in his role as Controller-Administrator, Hyzer was required to prepare Montcalm's yearly Financial Statements.
66,
During his tenure at Montcalm, Hyzer continuously made the decision and
recommended to Montcalm that
it
use the Defendants to perform the annual audit of Montcalm
and prepare the auditing Reports.
67.
Unbeknown
to the Board of
Commissioners, while Hyzer was Montcalm's
Controller-Administrator, he also maintained a close, relaxed and cozy relationship with some or
all of the shareholders/principals at Abraham & Gaffney. This relationship created, facilitated and hid an environment for sloppy, tardy and incorrect accounting, reporting and budget
created, facilitated and hid mistakes that would escalate
work. It
in proportion to place Montcalm
financially in harm's way. Defendants' Failure to Conduct Proper Audits
68.
Montcalm hereby incorporates the preceding paragraphs as though fu[y set forth
69.
Shortly after Hyzer began working as an employee for Montcalm in the position
herein.
of Controller, the Defendants stopped presenting the results from annual audits to the Board of Commissioners. Prior to this, they would meet with the Board of Commissioners and walk through the audit and provide any relevant or material information. Instead, the Defendants
would only report to Hyzer, representing to the Board appropriate and that there was nothing relevant Commissioners related
10 6843583.2 43588/3 r2697
Commissioners that this was
or material to report to the Board of
to the audit, the accounting estimates and policies or the
presentation of Financial Statements.
2 t
of
overall
70.
As a result, the Board of Commissioners had no knowledge regarding financial
errors and misstatements set forth in the yearly Financial Statements or about the unreasonable and dangerous accounting policies, practices and estimates of
Hyzer. For example, Hlzer would
take money from other funds, such as the delinquent tax fund, without a vote or approval and use
it to fund
At the time of his resignation, this money in the delinquent tax fund
expenses.
was
nearly depleted. Hyzer likely could no longer hide his misappropriation of this money from this
fund, which he did year after year without approval and without proper accounting practices.
71.
Likewise, the Board of Commissioners were unaware that Montcalm's budget
was consistently becoming materially unbalanced (escalating in size each year that Hyzer was in place) since the Defendants failed to present their findings to the Board of Commissioners.
72.
The Defendants began to secretly take on an even larger role in preparing journal
entries and in closing out the books for Montcalm as these things were not getting done by
Hyzer. Yet, the Defendants still failed to alert or disclose the growing accounting and financial issues to the Board
73.
of Commissioners.
In addition to failing to advise the Board of Commissioners on Montcalm's
accounting irregularities, the Defendants failed to conduct a proper audit.
74.
In fact, due to the Defendants' close and casual relationship with Hyzer,
Defendants failed
to
conduct any meaningful review
of
the
Montcalm's books, accounts,
transactions, financial records, and ledgers.
75.
Rather than performing an audit
in
accordance
to the Generally
Accepted
Auditing Standards, the Defendants appear to have simply "rubber stamped" Hyzer's work, his practices and policies, and the Financial Statements.
ll 2
t6843581.2 43588/3 12697
76.
As a result of Defendants' failure to properly audit Montcalm's Financial
Statements Financial and the Defendants' failure
to discuss the solvency issues of Montcalm
with the Board of Commissioners, the Board of Commissioners unknowingly
approved
numerous unbalanced budgets and spent money that Montcalm did not have. 77
.
The Board
consistently unbalanced
of
Commissioners only discovered that Montcalm's budget was
at about the same time that Hyzer resigned as the
Controller-
Administrator.
78.
By not clearly identifying and notiflng Montcalm of serious financial problems,
the Defendants prevented the Board of Commissioners from taking remedial actions to stop the county from losing money.
79.
The Board of Commissioners was only able to identift the numerous financial
errors, omissions, and .misstatements in Montcalm's Financial Statements when a subsequent investigation was performed by an independent third party.
80.
There were errors, omissions, and misstatements in the Financial Statements and
errors in the accounting practices used by Hyzer that were material and noncompliant that the Defendants failed to conect or disclose.
81.
In particular, the Defendants failed to disclose or correct significant deficiencies
in the internal control over financial repofiing. They also failed to disclose that the financial organizational system used
by Hyzer at Montcalm lacked
independent review
for
cash
reconciliation, payroll, adjusting journal entries, and accounts payable transactions, among other issues. Likewise, there were material weaknesses in the internal control over financial reporting
such that reconciliation for the pooled cash bank account was not being completed or reviewed
in a timely matter. In fact, the reconciliation ofthe pooled cash bank account was not completed
12 2
1
6a43 583.2 43 5A8t 3 12697
until several months after the end of the fiscal year. In other words, Defendants failed to disclose that the accounting and bookkeeping practices performed by Hyzer were not incompliance with state and federal law.
82. Due to
various material errors, omissions, misstatements, misleading
representations, inaccuracies and unreasonable policies and practices formulated by Hyzer, the
Defendants should have refused to perform an audit, removed themselves from the role of independent auditor
or simply alerted the Board of
Commissioners
to the problem with
Montcalm's finances.
83.
At around the time Hyzer resigned from his position at Montcalm, once
a third-
party had alerted them to the financial problems facing Montcalm, some of the Board of Commissioners met with Tucker and Tucker was questioned as to why Montcalm's financial problems were not disclosed to the Board
of Commissioners earlier. Astonishingly, Tucker
responded that '1he Board never asked the right questions."
84.
Upon information and belief, Hyzer chose
to
resign from his position
at
Montcalm because he and Defendants could no longer hide the mounting financial distress in which they had placed Montcalm and the reasons why those fmancial issues could no longer be hidden.
85.
The Defendants' failure to detect and/or disclose Montcalm's financial struggles
has resulted in over damages to Montcahn that exceed $25,000.
86.
The Defendants' actions (or lack thereof), as set forth herein, clearly jeopardized
the solvency of Montcalm.
l3 2|
6843s83.2 43588t 3 I 2691
COUNT
I
Maloractice/Professional Neglisence
87.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
88.
The Defendants held themselves out to the public, Montcalm, and the Board of
herein.
Commissioners as skilled and competent auditors.
89. The Defendants represented to
public, Montcalm, and the Board of
Commissioners that they were skilled and competent auditors and accountants.
90.
Based upon the Defendants' representations, Montcalm retained the Defendants to
audit its yearly Financial Statements.
91.
The Defendants agreed
to
perform auditing and accounting services for
Montcalm.
92.
Since the Defendants agteed to serve as Montcalm's independent auditor, the
Defendants owed a duty to Montcahn to perform the audits with the degree of care, skill, and
competence that would be exercised by an accountant and./or auditor
of ordinary
judgment, and skill under similar circumstances. By expanding their services
learning,
to
include
accounting work, they owed a duty to Montcalm to perform accounting with the degree ofcare,
skill and competence that would be exercised by an accounting of ordinary learning, judgment, and skill under similar circumstances.
93.
Moreover,
by
agreeing
to
serve
at
Montcalm's auditor, the Defendants
performance was subject to numerous regulations by various national auditing and auditing bodies, including the Federal Accounting Standard Advisory Board, which promulgates the
t4 2t 6843583.2 43588i3 t2697
national auditing and accounting standards known as Generally Accepted Auditing Standards and Generally Accepted Accounting Principles.
94.
The Defendants also owed a duty to Montcalm to independently evaluate the
validity and reliability of the internal Financial Statements prepared by Hyzer.
95.
The Defendant also had a duty to independently analyze Montcalm's books,
ledgers, accounts, and accounting systems
in order to act as a "watchdog" on behalf of
Montcalm, the Board of Commissioners, and the public at large.
96.
The Defendants breached the duties they owed to Montcalm by failing to perform
the audits with the degree of care, skill, and competence that would be exercised by
an
accountant and/or auditor of ordinary leaming, judgment, and skill under similar circumstances.
97.
The Defendants breached the duties they owed to Montcalm by failing to properly
and accurately audit the Financial Statements prepared by H1zer.
98.
Additionally, the Defendants breached the duties they owed to Montcalm by
failing to independently evaluate the validity and relatability of the Financial
Statements
prepared by Hyzer.
99.
The Defendants also breached the duties they owed to Montcalm by failing to
correct errors, misstatements, and inaccuracies in the Financial Statements.
100.
The Defendants also breached the duties they owed to their client, Montcalm, by
failing to disclose the financial issues Montcalm was facing.
101. The
Defendants also breached
their duties to Montcalm by failing
to
independently analyze Montcalm's books, ledgers, accounts, and accounting systems in order to
act as a "watchdog" on behalf of Montcalm, the Board of Commissioners, and the public at large.
l5 2r6843583.2 43588/3r2697
102. By the conduct alleged herein, the Defendants
failed in their obligations to
conform to the recognized standards ofcare in their performing their duties.
103.
Ifthe Defendants properly provided auditing services and accounting services,
Defendants would have detected errors, misstatements, and inaccuracies
the
in the Financial
Statements prepared by Hyzer.
104. If the Defendants properly
provided auditing and accounting services, the
Defendants would have detected the numerous errors, misstatements, and inaccuracies
in
the
Financial Statements and would have issued a Qualified Opinion Report, which would have alerted Montcalm and the Board of Commissioners to the issues and concems contained within the Financial Statements.
105. If the Defendants properly
provided auditing and accounting services, the
Defendants would have informed the Board
of Commissioners of errors,
misstatements, and
inaccuracies in the Financial Statements prepared by Hyzer and would have informed the Board
of Commissioners of errors,
misstatements, and inaccuracies
in Montcalm's books,
ledgers,
accounts, and accounting systems.
106. If the Defendants properly
provided auditing and accounting services, the
Defendants would have corrected the errors, misstatements, and inaccuracies in the Financial Statements prepared by Hyzer as
well
as corrected the errors, misstatements, and inaccuracies
in
Montcalm's books, ledgers, accounts, and accounting systems.
107. If the Defendants
properly provided auditing and accounting services, the
Defendants would have informed the Board of Commissioners of issues surrounding Montcalm's solvency and issues surrounding Hyzer's performance as Controller.
l6 2 I 6843 583.2 43 588 t1 |
2697
108. Due to the Defendants'
breaches, Montcalm, acting through
its Board of
Commissioners, was unaware of the financial issues Montcalm was facing.
109.
Since Montcalm, acting through its Board of Commissioners, was unaware of the
financial issues Montcalm was facing, the Board of Commissioners continued to approve annual budgets that were unbalanced and continued to permit Montcalm to spend more money than its revenue.
I10.
As a direct and proximate cause of these breaches by the Defendant, Montcalm
has suffered damages substantially in excess of$25,000.
111.
These damages would not have occurred but for the Defendants' breaches of their
duty.
WHEREFORE, Montcalm requests that this Court enter
a Judgment ordering
the
Defendants to pay Montcalm damages in excess of $25,000 plus lawful interest, costs, attorney
fees and expenses incurred, and award
it
such other relief as the Court may deem just and
appropriate.
COUNT
II
Fraud/Fraudulent MisreDresentation
112.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
ll3.
The Defendants made numerous material representations to Montcalm and the
herein.
Board of Commissioners, including, but not limited to, stating that the Board of Commissioners "adopted a budget that was conservative in nature so as to protect itself from the final results not meeting expectations."
t7 2 I 6843583.2 43 s88 13 t
2697
114.
The Defendants' material representations were untrue since Montcalm's budget
was unbalanced. I
15.
The Defendants' material representations were also untrue since Montcalm's
expenditures were higher than its revenue.
I16.
The Defendants knew that their representations were false when they were made
or the Defendants made those
representations
in reckless disregard for their truth and as a
positive assertion.
117.
The Defendants made the material representations in order to induce Montcalm
and the Board of Commissioners to maintain retaining the Defendants as their auditors.
I18.
The Defendants made the material representation in order to deceive Montcalm
and the Board of Commissioners to believe that Montcalm's expenditures and annual budgets were appropriate.
I19.
Montcalm, through the Board of Commissioners, relied upon the Defendants'
representations when they approved the annual budgets each year.
120. It
was reasonable for Montcalm to rely upon the Defendane' representations
since the Defendants held themselves out to the public, to Montcalm, and to the Board of Commissioners as skilled and competent auditors.
l2l.
As a direct and proximate result of Defendants' materially false representations,
Montcalm has suffered damages substantially in excess of$25,000.
WHEREFORE, Montcalm requests that this Court enter
a Judgment ordering the
Defendants to pay Montcalm damages in excess of S25,000, plus lawful interest, costs, attomey
fees and expenses incurred, and award
it
such other relief as the Court may deem just and
appropriate.
l8 216843583.2 435E8/312697
COUNT
III
Silent Fraud
122.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
herein.
123. As
Montcalm's independent auditor, the Defendants owed
a legal duty to
Montcalm and the Board of Commissions to advise Montcalm and the Board of Commissionen
of all material facts arising out of or relation to the Financial Statements prepared by Hyzer
as
discussed herein.
124.
to
Likewise, as Montcalm's independent auditor, the Defendants owed a legal duty
Montcalm and the Board
of
Commissions
to
advise Montcalm and the Board of
Commissioners of all material facts arising out of or relation to the financial wellbeing and solvency of Montcalm as discussed herein.
125.
The Defendants had actual knowledge that Montcalm's expenditures were higher
than its revenue.
126. The Defendants had actual
knowledge that Montcalm was facing financial
solvency issues.
127. The
Defendants had actual knowledge that Montcalm's budget remained
unbalanced for years.
128.
The Defendants had actual knowledge that Montcalm's books, records, and ledger
contained numerous errors, omissions, and inaccuracies.
129.
The Defendants had actual knowledge that the Financial Statements prepared by
Hyzer contained numerous errors, omissions, and inaccuracies.
19 216843583.2 43588/3 r269?
130.
The Defendants had actual knowledge of Hyzer's unorthodox and improper
accounting principles.
131. of
As discussed herein, the Defendants failed to disclose to Montcalm and the Board
Commissioners
all material facts arising out of or relation to the Financial
Statements
prepared by H1zer.
132. of
As discussed herein, the Defendants failed to disclose to Montcalm and the Board
Commissioners all material facts arising out
of or relation to the financial wellbeing of
Montcalm as discussed herein.
133. The
Defendants also failed
to
disclose
to
Montcalm and the Board of
Commissioners that Montcalm's budget remained unbalanced for years.
134.
The Defendants further failed to disclose that Montcalm's expenditures were
materially higher than its revenue.
135. The
Defendants also failed
to
disclose
to
Montcalm and the Board of
Commissioners that Montcalm's books, records, and ledger contained numerous elTors, omissions, and inaccuracies.
136. The
Defendants also failed
to
disclose
to
Montcalm and the Board of
Commissioners that the Financial Statements prepared by Hyzer contained numerous elrors, omissions, and inaccuracies.
137.
The Defendants failed to disclose that Hyzer was utilizing unorthodox and
improper accounting principles that create an illusion that Montcalm was financially stable when
it was not.
138.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Montcalm's budgets and expenditures were appropriate.
20 2 t 6843 583.2 43 s88/3 I
2697
139.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Montcalm was financially stable.
140.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Montcalm's books, records, and ledger were free from errors, omissions, and inaccuracies.
l4l.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Montcalm's revenue was higher than its expenditures.
142.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Montcalm's budgets were materially balanced.
143.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that the Financial Statements prepared by Hyzer were accurate, correct, and did not contain any errors. omissions, or inaccuracies.
144.
The Defendants' silence caused Montcalm and the Board of Commissioners to
have the false impression that Hfzer was utilizing proper accounting principles when managing
Montcalm's finances and performing his bookkeeping tasks.
145.
When the Defendants failed to disclose that the budget was unbalanced, the
Defendants knew the failure would create a false impression and intended that Montcalm and the Board of Commissions rely on the resulting false impression.
146.
When the Defendants failed to disclose that the Financial Statements prepared by
Hyzer were filled with errors, omissions, and inaccuracies, the Defendants knew the failure would create a false impression and intended that Montcalm and the Board of Commissions rely on the resulting false impression.
2t 2
r6843583.2 43588/3 r 2697
147.
When the Defendants failed to disclose that Montcalm's books, records, and
ledger contained errors, omissions, and inaccuracies, the Defendants knew the failure would create a false impression and intended that Montcalm and the Board of Commissions rely on the
resulting false impression.
148.
When the Defendants failed to disclose that Montcalm's budget was unbalanced,
the Defendants knew the failure would create a false impression and intended that Montcalm and the Board of Commissions rely on the resulting false impression.
149.
When the Defendants failed to disclose that Montcalm's expenditures were higher
than its revenue, the Defendants knew the failure would create a false impression and intended that Montcalm and the Board of Commissions rely on the resulting false impression.
150.
When the Defendants failed to disclose that Montcalm's was inching closer to
financial insolvency, the Defendants knew the failure would create a false impression and intended that Montcalrn and the Board of Commissions rely on the resulting false impression.
l5l.
When the Defendants failed to disclose irregularities and issues with Hyzer's
accounting methods and systems, the Defendants knew the failure would create
a
false
impression and intended that Montcalm and the Board of Commissions rely on the resulting false impression.
152.
The Defendants knew that their failure to issue a Qualified Opinion Report would
create a false impression on Montcalm and the Board
of Commissioners that the Financial
Statements prepared by Hyzer were true and accurate.
153.
The Defendants intended that Montcalm and the Board of Commissions would
rely on the resulting false impression that the Financial Statements prepared by Hyzer were true and accurate.
22 216843583.2 43588/3 12697
154.
Montcalm and the Board
of
Commissioners relied on these various false
impressions fiom the Defendants when the Board
of
Commissioners approved Montcalm's
annual budget each year.
155.
Montcalm and the Board of Commissioners further relied on the Defendants'
false impressions when it continued to retain Hyzer as its Controller-Administrator.
156.
Montcalm has been directly and proximately damaged as a result ofits reliance on
the Deiendants substantially in excess of $25,000.
WHEREFORE, Montcalm requests that this Court enter a Judgment ordering the Defendants to pay Montcalrn damages in excess of $25,000, plus lawful interest, costs, attomey
fees and expenses incurred, and award
it
such other relief as the Court may deem just and
appropriate.
COUNT IV Neglisent Misreoresentation
157.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
158.
The Defendants agreed to act as Montcalm's independent auditor.
159.
Since the Defendants agreed to serve as Montcalm's independent auditor, the
herein.
Defendants owed a duty to Montcalm to perform their audits with the degree of care, skill, and competence that would be exercised
by an accountant and/or auditor of ordinary leaming,
judgment, and skill under similar circumstances.
160.
Since the Defendants agreed to serve as Montcalm's independent auditor, the
Defendants also owed a legal duty to Montcalm and the Board
of
Commissions to advise
Montcalm and the Board of Commissioners of all material facts arising out of or relation to,
73 ?16843583.2 43588/312697
among other things, the appropriateness of accounting policies, the reasonableness of estimates and the overall presentation
16l.
offinancial statements
as discussed herein.
As Montcalm's independent auditor, the Defendants also owed a legal duty to
Montcalm and the Board of Commissions to advise Montcalm and the Board of Commissioners
ofall material facts arising out ofor relation to the financial wellbeing of Montcalm
as discussed
herein.
162.
By agreeing to serve as Montcalm's auditor, the Defendants were also subject to
numerous regulations by various national auditing and auditing bodies, including the Federal
Accounting Standard Advisory Board, which promulgated national auditing and accounting standards known as Generally Accepted Auditing Standards and Generally Accepted Accounting
Principles.
163. As Montcalm
to
Montcalm's independent auditor, the Defendants also owed
independently evaluate the validity and reliability
a duty to
of the intemal
Financial
Statements prepared by Hyzer.
164.
The Defendant also had a duty to independently analyze Montcalm's books,
ledgers, accounts, and accounting systems to act as a "watchdog" on behalf of Montcalm, the Board of Commissioners, and the public at large.
165.
These duties included providing
full and accurate information to Montcalm
and
the Board of Commissioners conceming material facts that may impact Montcalm's financial position and solvency.
166.
These duties also included providing
Montcalm's Financial Statements prepared by Hyzer.
216843583.2 43588/312697
full and accurate information conceming
167. In breach of their
duties, the Defendants misrepresented material information
regarding Montcalm's financial position to Montcalm and the Board of Commissioners that the Defendants asserted to be the truth when,
in fact, the
Defendants did not know ether the
information was truth or not.
168. In further
breach
of their duties, the Defendants misrepresented
material
information to Montcalm and the Board of Commissions regarding the accuracy of Montcalm's Financial Statements that the Defendants asserted to be the truth when, in fact, the Defendants did not know ether the information was truth or not.
169.
Montcalm and the Board of Commissioners reasonably and justifiably relied upon
said misrepresentations in continuing to approve Montcalm's annual budgets.
170.
The Defendants knew or should have known that Montcalm wouldjustifiably rely
on the information provided by the Defendants and on reasonable inferences from
that
information as the Defendants were retained to audit Montcalm's Financial Statements.
17l. As a
direct and proximate consequence, Montcalm has been
damaged
substantially in excess of $25,000.
WHEREFORE, Montcalm requests that this Court enter
a Judgnent ordering the
Defendants to pay Montcalm damages in excess of $25,000, plus lawful interest, costs, attorney
fees and expenses incurred, and award
it
such other relief as the Coud may deem just and
appropriate.
COUNTV Innocent Misrepresentation
172.
Montcalm hereby incorporates the preceding paragraphs as though fully set fonh
herein.
25 216843583.2 43588/312697
173.
The Defendants held themselves out to the public, to Montcalm, and to the Board
of Commissioners as skilled and competent auditors and accountants.
174.
The Defendants represented to Montcalm and the Board of Commissioners that
they were skilled, independent, and competent auditors and accountants.
175.
Based upon these representations from the Defendant, Montcalm retained the
Defendants to audit their annual Financial Statements and accounting systems.
176.
Through the parties' contract, the Defendants agreed to perform independent
auditing services for Montcalm and to provide accounting services from time to time in relation to the audits.
177.
As described herein, the Defendants made numerous material representations to
Montcalm and the Board of Commissioners, including, but not limited to, that the Defendants were skilled, competent, and independent auditors and accountants.
178.
These material representations were made
in connection with the making of
a
contract between Board of Commissioners, acting on behalf of Montcalm, and the Defendants for auditing services.
179.
The material representations were false when made since the Defendants were not
independent from Hyzer.
180.
The material representations were false when made since the Defendants were
neither skilled nor competent when performing their auditing and accounting services
as
provided herein.
l8l.
Due to Hlzer's and the Defendants' history of working together, the Defendants
failed to remain independent when conducting audits of Montcalm's Financial Statements.
t6 2 16843583.2 43588/312697
182. In particular,
the Defendants failed to remain independent by helping Hfzer
perform his journal and ledger entries.
183.
Furthermore, the Defendants were not skilled nor were they competent auditors
since they failed to detect numerous accounting errors, omissions, and inaccuracies
in
the
Financial Statements as well as numerous accounting errors, omissions, and inaccuracies in Montcalm's financial records, books, and ledger.
184.
The Board of Commissioners, acting on behalf of Montcalm, would not have
entered into a contract for auditing services
if
the Defendants had not made the material
representations that they were skilled and competent professionals and could remain independent
fiom Hyzer.
185.
The Board of Commissioners, acting on behalf of Montcalm, relied upon the
Defendants' materially false representations that they were skilled, competent and independent auditors, and could remain entirely separate from Hyzer.
186.
The Defendants' material false representations that they could serve as skilled
independent auditors and could remain separate from Hyzer deceived Montcalm and the Board
ol Commissioners into believing that the
Defendants were skilled and competent auditors, and
were capable of remaining independent from Hyzer when completing their audits.
187. The
Defendants' materially false representations that they could serve
as
independent skilled auditors and could remain separate from Hyzer proximately and directly caused Montcalm to sustain damages substantially in excess of$25,000.
188.
Since the Defendants failed to inform Montcalm and the Board of Commissioners
that they could not remain independent from Hyzer, the Defendants benefitted from Montcalm's
justifiable reliance and llom Montcalm's monetary losses.
27 2t 6843583.2 43 588t 3 t 2697
189. its Board of
The Defendants benefitted from Montcalm's losses because Montcalm, through Commissioners, was unaware that the Defendants were unable
independent and separate from Hyzer and continued
to
remain
to retain the Defendants to perform
the
yearly audits.
190.
The Defendants further benefitted from Montcalm's losses because Montcalm,
through its Board of Commissioners, was unaware that the Defendants were unable to perform the yearly audits in a competent manner.
WHEREFORE, Montcalm requests that this Court enter
a
Judgrnent ordering the
Defendants to pay Montcalm substantially in excess of $25,000, plus lawful interest, costs, attomey fees and expenses incurred, and award it such other relief as the Court may deem just and appropri ate.
COI,]NTVI Breach of Contract
l9l.
Montcalm hereby incorporates the preceding paragraphs as though fully set forth
192.
Montcalm entered into an agreement with Defendants in which Defendants agreed
herein.
to provide auditing services and,
193. In
addition
if
necessary, accounting services.
to providing an expression of opinion as to
whether financial
statements were fairly presented, in all material respects, in conformity with Generally Accepted
Accounting Principles and as to the overall fairness of supplementary information in relation to the financial statements taken as a whole, Defendants also agreed to report on internal conrols and compliance and to inform the Board of Commissioners of any material abuse, violations
law, fraud or other types oferror or misappropriation ofassets that comes to its attention.
28 2 t 6843 583.2 4 3 588 t 3 1269'1
of
194.
Defendants breached the agreement when, among other things, they had or should
have had reasonable assurance that there were material misstatements in the financial statements
from errors, fraudulent financial reporting, misappropriation or violations of law or govemment relations attributable to acts of employees acting on behalf of Montcalm as more fully discussed above.
195.
Defendants breached the agreement when they failed to, among other things,
disclose to the Board of Commissioners that there were material misstatements in the financial statements from errors, fraudulent financial reporting, misappropriation or violations
of law or
govemment relations attributable to acts of employees acting on behalf of Montcalm as more
fully discussed above.
196.
Defendants breached the agreement when they failed to, among other things,
obtain an understanding of Montcalm's accounting environment, including intemal controls, sufficient to assess the risks of material misstatements or in being prevented from detecting them resulting from non-compliance or other acts or omissions as more fully discussed above.
197.
Montcalm has suffered damages substantially in excess of $25,000 as a direct and
proximate cause of Defendants' breach ofthe agreement.
WHEREFORE, Montcalm requests that this Court enter
a Judgnent ordering the
Defendants to pay Montcalm damages in excess of $25,000, plus lawful interest, costs, attorney
fees and expenses incurred, and award
it
such other relief as the Court may deem just and
appropriate.
29 216843583.2 43588/312697
THf, ABOVE INFORMATION IS TR MY INFORMATION, KNOWLEDGE
BEST OF F.
Dated: February 15,2018
atrick Q. Can Chairman of Montcaln.r County Board Conrmissioners
ed,
Dated: Febnrary 15, 2018
B P eter
Li
l2
Llp eli aIt
Watson (P45320)
Mariah S. Mumford (P19945) 151 S. Old Woodwald Ave., Ste.200 Birmingham, MI 48009 (248) 988-5881 Allornel'ls.[os
llt,tlcu
Itn CoLtttt)'
JURY DEMAND Plaintiff County of Montcalm deniands
Dated: Febluary 15, 2018
a
trial by jury on all issues so triable.
By
n(P
8
r2)
M. Watson (P45320) Mariah S. Mumford (P79945) I 5l S. OId Woodwald Ave., Ste. 200 a
Birmingham, MI 48009 (248) 988-s881 Attornel,s 167 J1,[en tco I tn Counly
30 2r 6843s81 2
41s88/
2697
of