CPAs and Lawyers: Kindred Spirits?
By Melissa Hoffmann Lajara
Posted on 7/9/09

NEW YORK -- The legal profession and the profession of accountancy frequently intertwine. As local attorney Richard M. Morris put it recently, “We all solve problems for our clients. We both have the same goal in mind.”

“There are a lot of areas we cross over on,” agreed Marc A. Engel, immediate past chair of the NYSSCPA’s Litigation Services Committee.

However, the needs and problems of clients have grown in number and complexity as the economy has shrunk, putting more pressure on both types of trusted advisor.

So it was, perhaps, a natural choice to bring these two professions together in a special session that provided its attendees with both continuing professional education (CPE) in accounting and continuing legal education (CLE), as well as a chance to discuss the challenges both professions face.

Morris illustrated the biggest challenge with a sports analogy: “In basketball, on a fast break, you’re working very quickly to solve the problem of getting to your goal. You need to know where the other players are on the court,” he said. “I don’t know whether it’s the New York environment, but all clients demand you work at a fast break. Every professional is expected to know their place on court … and react properly to the environment.”

In order to do this, CPAs and lawyers not only have to keep their knowledge keen, but also communicate to avoid the professional equivalent of a technical foul or an errant pass.

This communication was the goal of the special session, held on May 7 across the street from the NYSSCPA headquarters in Manhattan at the law firm, Herrick, Feinstein LLP, and sponsored by the NYSSCPA’s Litigation Services Committee.

There, Morris—along with colleagues Steven Feldman and Gary Eisenberg—discussed what CPAs and attorneys should look for when a client is in trouble.

Just because a company is having trouble or discovers some questionable activity doesn’t necessarily mean an indictment will follow, Morris said. It’s the advisor’s job to help the client company behave correctly under these types of circumstances. Owners, investors, managers and auditors all run the risk of being victims of fraud.

He gave some examples of areas in which it’s important for CPAs to pay close attention. One is what he called ratio analysis.

“There are certain accounting relationships that you expect,” Morris said. “You have that information, but the ratio is changing. What are the reasons for the change? That’s one thing a CPA should look into. The numbers reflect the story.”

Then there are affiliate transactions, he said. Also known as a transfer price, this is a charge made when one company division provides goods or services to another company division.

“That’s another area where the information is held by CPAs, as a footnote in financial statements,” Morris said. “Ghost employees are typically an affiliate transaction.”

Ghost employees are those listed on the company’s books who don’t really exist, Engel said. A reverse ghost is the exact opposite: an employee taken off the books who still works and earns pay “under-the-table.”

Morris said that it is important to evaluate how the enterprise’s value “is getting out of the company, but not into the hands of its stakeholders.”

Some other red flags cited by Morris include:

Perhaps one of the most unusual audit methods Morris said that he used to employ when he was a practicing CPA was one which Engel described as the “coffee method.”

“The first thing I did in a regular audit is ask: ‘Where’s the coffee room?’” Morris said. “I’d go and get the coffee myself. If you have a dirty coffee room, what someone is saying is, ‘It’s not my job to clean it.’ Odds are they were saying ‘It’s not my job’ in the accounting room as well. There’s a strong correlation between a dirty coffee room and a bear of an audit.”

Later in the session, Morris and his colleagues illustrated the differing perspective among clients, shareholders, employees and lenders on the current bankruptcy environment.

Engel said the session was received well by committee members and that he has seen overall participation in the Litigation Services Committee increase since it began offering more CPE sessions. The committee hopes to plan more joint CPE/CLE sessions in the future, Engel said.

“There’s a real value in partnering with trusted advisors,” said Morris. “We learn as much from the CPAs as they learn from us.”