A school district in New York has sued its outside accounting firm for $12 million, asserting that millions of dollars in misspent funds went undetected.

The lawsuit, along with a stinging report by New York State Comptroller Alan G. Hevesi, has prompted about 50 other Long Island school districts that used Miller, Lilly and Pierce to consider firing the East Setauket-based firm, according to Suffolk Life newspapers.

The Roslyn School District contends that the firm missed the fact that the school superintendent, business manager and others misspent funds. The school district also sued software company Finance Manager, which supplied the Roslyn district's computer system to track finances.

The newspaper reported that the firm did not examine canceled checks, instead relying on fraudulent payment information that was inserted in the district's records by district officials to cover up their wrongdoing, Hevesi's report said. Once a whistle-blower exposed the fraud, the CPA firm investigated and found only $223,136 in inappropriate payments; state auditors found $1.6 million.

Hevesi said, "The work of Miller, Lilly & Pearce was so appallingly inadequate that it would shock anyone associated with the auditing profession, and certainly the taxpayers who depend on the firm to safeguard their money." Hevesi also said the firm's partners "sold financial and other software to [the Roslyn School District], which creates a conflict of interest, and violates professional standards requiring auditors to be independent."

The East Hampton School District has used the firm for the last five years. Superintendent Raymond Gualtieri said he is "extremely disappointed and feels let down." He said the firm has acted professionally, but he underscored that Miller, Lilly & Pearce's "credibility has been severely damaged."

Hevesi's report went on to say that the firm did not meet nine of 22 professional auditing standards, and Hevesi urged the New York State Board for Public Accountancy to pursue the matter.

The New York Times, citing local officials, reported on Thursday that the accounting firm was going out of business. The firm declined to comment.