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CHICAGO (Crain's)—Hit with a $50 million verdict for negligence, Baker Tilly Virchow Krause L.L.P. is suing its insurer for refusing to cover most of the damages—two troubling developments for an accounting firm with revenue of $259 million for the year ended May 31.
The Wisconsin county court jury verdict and the two-plus years of litigation leading up to it already have slowed Baker Tilly's expansion plans, industry consultant Allan Koltin said. He predicts the verdict, reached in late May, will be overturned on appeal but added, “If they lost it, it would put them in jeopardy.”
A spokesman for Camico Mutual Insurance Co. in San Mateo, Calif., which insures CPA firms, agreed that the size of the award for damages is “pretty unusual” for the industry.
Founded in 1931 in Wisconsin, Baker Tilly was known as Virchow Krause & Co. when it moved into Chicago with a 2004 merger. Since then, it has embraced a Chicago identity, displaying its name on a Michigan Avenue building, as it attempts to spread its wings and reputation as a regional—and potentially nationwide—accounting firm.
With midsize clients in manufacturing, distribution and real estate, it is the nation's 17th-largest accounting firm by revenue, according to Atlanta-based Public Accounting Report.
In Chicago, where CEO Timothy Christen owns a downtown condo, it is just outside the top 10 by professional headcount, which surged by a third, to 207 in the year ended June 30.
It was named one of Crain's Chicago Business' 2012 best places to work.
Baker Tilly's hopes of reaching the coasts have been frustrated, though, said Jonathan Hamilton, managing editor of Las Vegas-based Accounting News Report.
He and others said Baker Tilly explored a three-way deal that instead became a two-way affair when Reznick Group P.C. of Bethesda, Md., and J.H. Cohn L.L.P. of Roseland, N.J., announced in May that they would combine in New York to create the 11th-largest accounting firm in the U.S.
Mr. Koltin, CEO of Koltin Consulting Group Inc. in Chicago, said Baker Tilly's next big move will be in New York, where it is talking merger with a firm he wouldn't name. Mr. Christen did not return calls seeking comment.
Baker Tilly's legal troubles in Wisconsin started when consumer-finance client Aqua Finance Inc. of Wausau alleged in 2010 that its auditor had discovered a defect in Aqua Finance's accounting but waited a year to disclose it. Then, the complaint further alleged, Baker Tilly abruptly withdrew from the account in 2008 and hindered the timely hiring of a replacement auditor.
This left Aqua Finance without audited financial statements just as the credit crisis was brewing, which “dramatically and catastrophically impeded the company's crucial access to the credit necessary to maintain and grow its business,” according to the complaint.
Baker Tilly denies the allegations and says it plans to appeal. It also filed a counterclaim, alleging that Aqua Finance breached contract agreements and indemnification provisions.
In a statement, Baker Tilly said: “We are very disappointed by the jury's verdict and believe the damages awarded in this case are excessive. We firmly believe that the facts of this case clearly show that our work and conduct did not contribute to Aqua Finance's difficulties.”
Aqua Finance said it buys and services contracts for purchase of water treatment and other home-improvement products and that the monthly volume of those contracts fell by more than 90% to less than $1.5 million, while employment skidded to 97 from 380, between 2008 and 2010.
“Baker Tilly's conduct not only has crippled Aqua Finance's business and caused the loss of tens of millions of dollars in profits, but it has cost many Wausau residents their jobs and their livelihoods,” the company said in an amended complaint last year.
A court filing showed that even before the alleged accounting problems, Aqua Finance's net income was volatile, bouncing between $3.9 million and $5.3 million from 2001 to 2006.
Meanwhile, Baker Tilly in April sued Lexington Insurance Co. for breach of contract, alleging that the Boston-based carrier failed to defend it against Aqua Finance's claims and provide as much as $40 million in professional liability coverage, as specified in a one-year contract in place when Aqua Finance's lawsuit was filed.
“We feel there is no basis for this,” said an attorney for Lexington, Stephen Kravit of Kravit Hovel & Krawczyk S.C. in Milwaukee. “They did not reveal the known issue concerning their potential liability for malpractice to Lexington at the time coverage was sought.”
The suit was removed to federal court, and Lexington has filed a motion to stay the litigation and require arbitration. Thomas Falkenberg, a Chicago attorney for Baker Tilly at Williams Montgomery & John Ltd., did not return calls.
Steven R. Strahler is a reporter for Crain's Chicago Business, a sister publication of Business Insurance.