Every successful business decision you make relies on one critical foundation: accurate financial information. Your accounting team does not just track numbers. They provide the financial clarity that guides your strategic planning, tax compliance and ultimately, your company’s growth trajectory.
When you partner with accounting professionals, you are placing tremendous trust in their expertise. Unfortunately, even the most reputable firms can make mistakes, from tax filing errors to misrepresented financial statements that affect major business decisions.
What happens when you discover that your trusted financial advisors have made costly errors? In California, you have legal recourse, but you must act quickly. Missing deadlines can permanently forfeit your right to recover damages, regardless of how clear the malpractice may be.
California’s two-year rule
California law generally gives business owners two years to file accounting malpractice claims under Civil Procedure Code Section 339(1). This means you typically have just 24 months from when the malpractice occurred to take legal action.
However, as with many aspects of business law, the reality is more nuanced than a simple two-year countdown.
The discovery rule: When the clock starts
The law recognizes that accounting errors are not always immediately apparent. The “discovery rule” provides that the two-year statute of limitations begins to run only when you:
- Actually discover the wrongful act or omission, or
- Should have discovered it through reasonable diligence
This distinction is crucial. For example, if your accountant made a significant error on your 2020 tax returns, but you did not discover this error until a 2023 IRS audit, the statute of limitations may begin running in 2023, not 2020.
Continuous representation exception
Another important exception exists when an accounting firm continues to represent your business on the same matter where the alleged malpractice occurred. In such cases, the statute of limitations may be “tolled” (paused) until that representation ends.
This prevents the uncomfortable situation of having to sue your accountant while they are still working to remedy the issue.
Written contracts may extend your timeline
If your relationship with your accounting firm is governed by a written contract, you may benefit from California’s longer four-year statute of limitations for written contract breaches under California Code of Civil Procedure Section 337. This can potentially give your business additional time to pursue claims.
Special considerations for tax-related malpractice
For tax-related malpractice, the timeline becomes even more complex. Courts have sometimes held that the statute does not begin to run until the tax authorities have made a final determination on the issue.
The cost of waiting
Delaying action after discovering accounting malpractice can be costly. Beyond potentially missing the statute of limitations window, evidence may become more difficult to gather, witnesses’ memories may fade and the financial impact on your business may compound.
When to seek legal help
If you suspect accounting malpractice has harmed your business, consult experienced legal counsel immediately. Beyond addressing statute of limitations concerns, a knowledgeable attorney can assess your claim’s viability, preserve evidence, navigate complex timing issues, accurately calculate damages and develop an effective recovery strategy.
Protecting your business’s future
Your business’s financial health is too important to leave vulnerable to accounting errors or negligence. Understanding the time constraints for pursuing malpractice claims is an essential part of your risk management strategy.