Michael Trent Reznor met John Malm Jr., a part-time promoter of local rock bands who also is a licensed CPA, in Cleveland, Ohio, in 1985. Malm became Reznor's manager and formed J. Artist Management (JAM), Inc. Reznor became the lead singer in the band Nine Inch Nails, which performed its first show in 1988. Reznor and Malm signed a management agreement, under which JAM was to receive 20 percent of Reznor's gross compensation.
In 1966, Malm hired a CPA, Richard Szekelyi, and his firm, Navigent Group, to provide tax consulting services to Reznor personally; his duties also included examining Reznor's financial records. Szekelyi discovered flawed accounting between the two parties to the detriment of Reznor by about $4 million. The primary cause was that Malm received tax benefits that should have gone to Reznor. 2 Reznor filed a separate lawsuit against codefendants Szekelyi and Navigent Group, charging them with negligence, breach of fiduciary duty, and aiding and abetting fraud. The codefendants sought summary judgment to dismiss Reznor's claims, stating that they did not breach any standard of care in preparing or presenting reports of Reznor's financial status, nor did Szekelyi fail to counsel Reznor adequately concerning other transactions.
The court granted the summary judgment dismissing the charges against Szekelyi and Navigent. 3 Reznor had also filed a lawsuit in 2004 in New York, claiming that former manager Malm mismanaged the band's finances and actually stole money from them. Apparently, Ma Reznor into signing a contract that assigned the manager 20 percent of gross earnings. The problem is that the assignment should have been of net income, not gross earnings. This means that Malm would have received 20 percent of all earnings, before taxes and before more important distributions like his band member payments.
On June 1, 2005, a verdict was rendered in favor of Reznor. Malm was ordered to pay up to $2.9 million for allegedly cheating Reznor out of millions. The verdict also awarded trademarks back to Reznor.
Questions
1. Describe the nature of the relationship between Szekelyi and Reznor. Did a privity relationship exist between the two? Why or why not?
2. What were Szekelyi's ethical obligations to Reznor, given the nature of the services provided? Which of the ethics standards in the AICPA Code should have been of particular concern to Szekelyi in performing professional services for Reznor?
3. During the course of working as the manager for Nine Inch Nails, John Malm mismanaged the band's finances and was found guilty of those charges. Malm, who is a CPA, was not hired to perform any accounting services for Reznor or the band. Does that mean his actions are not enforceable under the AICPA Code of Professional Conduct? Would a state board of accountancy have any recourse with respect to Malm's transgressions?