A company”™s controller receives an anonymous note saying the manager of the accounting department is “stealing” from the company. A quick and quiet investigation reveals that the address of one of the hundreds of vendors engaged by the company matches the address of the accounting department manager. The invoices in the file do not provide extensive detail and nobody recognizes the name or purpose of the vendor. Although no single invoice is substantial, a quick tally shows that hundreds of thousands of dollars was paid to this “vendor” over the past few years.
In such situations, thoughts quickly turn to who is responsible and inevitably, the company focuses on the outside accountants. After all, “they are the auditors; they should have caught this!” That, however, is often not the case. Indeed, as innumerable accounting malpractice lawsuits have revealed, clients and accountants often have a different understanding of the accountant”™s role, which is to the detriment of both.
The difference between what a client believes the accountant”™s responsibilities to be and what the accountant”™s responsibilities actually are is sometimes called the “expectation gap,” which at its heart is caused by ineffective communication between the accountant and the client. The accountant did not effectively convey to the client what his or her role and limitations would be and the client did not understand the scope of the accountant”™s responsibilities.
The most popular misconception is that the accountant is “responsible for the money,” and if any is missing, the account is liable. Typical financial statement audits performed by an outside accountant (the type of audits required by creditors and investors) are not designed to uncover fraud or embezzlement and cannot be relied upon by management to do so. Further, an outside CPA that does little more than prepare a company”™s tax returns, even if there is some write-up work involved, is not responsible for verifying the accuracy or propriety of the information used to prepare those tax returns. Simply put, the outside CPA is not usually in the best position to monitor the financial activity of the client or prevent fraud.
If an accountant is not “responsible for the money,” what is the accountant responsible for?
Financial statement audits: If the accountant is conducting a financial statement audit, it must be done in accordance with generally accepted auditing standards such that the firm can opine whether or not the company”™s financial statements are prepared in accordance with generally accepted accountings principles and are free from material misstatements. Nowhere in that engagement will one find support for the idea that the accountant “should have or will” uncover each and every fraud. This is not to say that the auditor will not bring such discoveries to the attention of management ”“ indeed an auditor should. However, a typical audit is not designed to uncover fraud and should not be relied upon by management to do so.
Fraud audits and integrated audits: If management is interested in an audit designed to uncover fraud or weak internal controls, then management should engage an accountant to do just that. A “fraud audit” is an engagement designed to uncover fraudulent activity and an “integrated audit” is a typical financial statement audit with added procedures designed to test and evaluate internal controls. Both types of engagements go beyond a typical audit in both scope and cost, but they can give management comfort that the likelihood of fraudulent activity is very low.
Scope of services: The scope of the services provided by outside accountants is usually set forth in the accountant”™s engagement letter, which is a legal contract signed by both parties that carries significant weight in later court proceedings. The engagement letter should be thoughtfully reviewed and the type of engagement actually requested and the parameters set forth in the letter should match the company”™s expectations.
William Kelly is a partner in Wilson Elser”™s White Plains office. A member of the firm”™s accountant practice, he provides comprehensive legal services to accountants and related financial professionals, including brokers and business managers.
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