War Story Quiz: Do These Allegations of Unethical Behavior Have Merit?

By:
DUNCAN B. WILL, CPA/ABV/CFF, CFE
Published Date:
Apr 22, 2014

Editor’s Note: “War Stories” are drawn from the claims files of Camico, a CPA-directed insurer and risk management program for accountants, and illustrates some of the dangers and pitfalls in the accounting profession. All names have been changed.

Andrew Donovan, CPA, began his career at Able, Best & Charm (ABC), a large regional accounting firm. After many long years of punching a timesheet, he decided to branch off on his own and start the accounting/consulting firm Worth What You Pay (WWYP) consultants.

Below are three scenarios involving allegations against WWYP. Which have merit? The answers are included at the end of the article.

Allegation #1
Andrew had great relationships with his ABC clients and knew they would be a substantial component of his new firm’s client base. To ease the clients’ transition, he invested in software identical to ABC’s and made duplicate copies of his ABC clients’ electronic files.

ABC later alleged that, by taking the electronic files without first obtaining consent from it or its clients, Andrew behaved in a way that was discreditable to the profession and violated client confidentiality.

Andrew disputed the allegations, arguing that 1) he only copied but did not remove the records, 2) most of the clients elected to become WWYP clients and 3) he destroyed the files of entities that chose to remain with ABC.

Allegation #2
Andrew had always bristled at having to account for his time and was determined to get out from under that burden when he launched WWYP. Instead of the traditional hourly billing approach, Andrew’s new firm embraced “value billing.” In other words, when he invested a considerable amount of time on a project that didn’t bear fruit, Andrew ate the time. But when he knew just what to do and would finish a project within hours or minutes, he would bill the “value” of his work, which was often much more than what the actual time would indicate.

Despite signing an engagement letter that included language detailing the value billing, one of WWYP’s clients disputed the propriety of the terms, claiming that the billing practice is unethical and violates professional standards.

Allegation #3
Andrew knew that his newly formed firm, WWYP, could not perform financial reporting services, as the firm had chosen not to participate in the profession’s peer review program. Instead, the firm offered tax compliance, tax planning, business valuation, a variety of agreed-upon procedures (including attestation) and bookkeeping services.

Investors and creditors of one of his clients sued WWYP, alleging that the firm 1) should have discovered a devastating embezzlement by management, 2) was required to be independent but was not and 3) should have undergone an engagement review.

Andrew and WWYP dispute each allegation, arguing that 1) the firm’s engagement letters stated that its services couldn’t be relied upon to disclose errors, fraud, misappropriation of assets or illegal acts; 2) services were limited to a few agreed-upon procedures, including attestation, tax compliance and bookkeeping, so independence was not required; and 3) no peer review was required, since financial statement preparation services were limited to management-use-only financial statements.

Answers:
Allegation #1—ABC’s allegations have merit. The AICPA’s ET Section 591 Ruling 191 prohibits these actions, and ABC has a duty to its clients to maintain their confidentiality. Not only is Andrew wrong to take files without consent, but ABC would be violating its clients’ confidentiality if it had remained silent on the matter.

Allegation #2—The client’s claim is without merit. There are no professional standards prohibiting value billing. Though value billing may not fit each situation, it is appropriate in some circumstances.

Allegation #3—The allegations have merit. Including a clause in an engagement letter disclaiming responsibility for preventing and detecting improprieties is a good best practice and is often mandated by professional standards. However, it’s still not a panacea against causes of action alleging that the accountant’s services should have prevented or detected the impropriety.

WWYP performed agreed-upon procedures (AUP) engagements, some of which were attestation services. By definition, this means that accountants performing these services must be independent of their client. Therefore, the allegations are valid. The firm would need to have taken appropriate steps to maintain its independence.

The firm’s understanding of services that would subject a firm to peer review is flawed. CPA firms are subject to peer review if they report on historical or prospective financial statements and if they perform a variety of other attest engagements, including several types of agreed-upon procedures engagements.

Duncan B. Will, CPA/ABV/CFF, CFE, is the loss prevention manager as well as an accounting and auditing specialist with Camico (www.camico.com). With more than 30 years in accounting, he manages his department’s efforts to deliver to policyholders the high-quality Camico experience.

(Upstate) Reggie DeJean, Lawley Service, Inc., 716-849-8618, and (Downstate) Dan Hudson, Chesapeake Professional Liability Brokers, Inc., 410-757-1932.  

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