Experience has shown that adhering to CPA professional standards is not always sufficient in protecting accountants from liability. Most members of the public, including jurors, do not understand the finer distinctions professional standards make between different types of accounting services. As a result, the public tends to regard professional standards as the minimum requirements CPAs should meet.
In addition to abiding by professional standards, CPAs are expected to take further steps to “get the job done right.” CPAs need to be aware of this expectation, regardless of whether they consider it to be fair or reasonable, because these additional steps form the basis of “jury standards” or “claims standards” and can play a significant role in the decision-making process of jurors.
The following are examples of claim standards that jurors (which have the benefit of hindsight) create as they assess situations.
Sixty-three percent of the respondents stated that top company executives must rely on the accounting professionals they have to bring unlawful transactions to their attention.
The public also expects accountants to maintain a high level of professional skepticism toward clients, even if a long-term relationship with the client exists. In fact, a long-term relationship generally heightens the perception that the CPA was in collusion with the client when fraudulent activity has occurred.
In one Camico case, the accounting firm had performed a review that enabled a troubled manufacturer of furnaces to obtain a large loan from a major lender. The manufacturer, which had been a client of the accounting firm for several years, subsequently filed for bankruptcy and defaulted on the loan, prompting the lender to sue the accounting firm for its losses.
The client had clearly committed some form of fraud to conceal its true financial condition from the firm, but the lender alleged that the review was substandard in failing to disclose the financial condition. The firm’s CPA and the lender both knew that the client had experienced severe losses in the preceding years, but neither the CPA nor the lender exercised enough professional skepticism to consider that the client might falsify records in order to obtain the loan.
An investigation revealed that the client’s inventory had been overstated because work in process (WIP) figures had not been properly retired from the books on a timely basis after jobs were completed. During the review, the CPA had not checked the computer runs of WIP figures against the actual accounts, which had apparently been falsified by an individual overriding the computer system.
Because juries often hold CPAs performing compilations and reviews to the same standards as auditors, a jury easily could have found the accounting firm completely liable for the bank’s losses. In fact, Camico claims data shows that 41 percent of all of Camico’s claims for review and compilation services are due to fraud, and 45 percent of all the claims dollars paid out for review and compilation claims are due to fraud.
In this case, attorneys for the firm were able to show that the bank’s own auditor was unable to detect the fraud. According to professional standards (SAS No. 82), auditors have a responsibility to obtain reasonable assurance that “the financial statements are free of material misstatement, whether caused by error or fraud.”
Even so, audits have their limitations when it comes to fraud, as the standards state: “Because of the concealment aspects of fraudulent activity, including the fact that fraud often involves collusion or falsified documentation … even a properly planned and performed audit may not detect a material misstatement resulting from fraud.” It is this limitation that jurors tend to disregard when assessing an audit that failed to detect a material misstatement. The professional standards also state that compilation and review services cannot be relied on to detect errors, fraud, or illegal acts—also a limitation jurors tend to ignore when assessing why a review failed to reveal a material misstatement.
CPAs must be conscious of the fact that, regardless of which type of service they are contracted to provide, jurors will most likely hold CPAs to the highest professional standards.
John F. Raspante is manager of Camico’s New York office and leads Camico’s new business efforts in New York State and the northeast.
