Montcalm county vs abraham gaffney

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