By Suzanne M. Holl

Many CPA firms perform bank reconciliations for clients as an ancillary service. In the event of an embezzlement, clients may allege that the CPA’s bank reconciliations failed to detect the theft. Furthermore, CPA engagement letters often only address the tax work and not the bank reconciliation services being performed.

What Is the Liability Exposure?

Surprising to many CPAs are the liability risks they face in doing what they consider to be a low-level service for their clients. Camico claims specialists will tell you that bank reconciliations present significant exposure to CPAs if the scope and limits of a bank reconciliation have not been adequately communicated to clients.

The CPA’s perception of client expectations usually turns out to be very different from what the client claims when an embezzlement occurs, according to Hunter Colby, J.D., Camico claims specialist. Clients will often claim that they believed their CPA (their “trusted financial advisor”) was performing bank reconciliations in order to detect potential embezzlement problems.

Clients and juries take client expectations seriously but often misunderstand:

1. the role of accountants;
2. the differences between the types of services CPAs perform; and
3. common accounting terminology (e.g., “bank reconciliation,” “summary proof of cash”).

Such misunderstandings may lead juries to believe that clients had a right to expect their CPAs to take any and all efforts to look out for and protect the interests of clients, regardless of the limits of the engagement.

The best line of defense against these misunderstandings is a well-defined engagement letter signed by the client. Also beneficial is written documentation from the CPA, informing the client about potential weaknesses in internal controls. If appropriate, the CPA can also offer additional services to the client to address such weaknesses.

To avoid similar exposures when performing bank reconciliations, have current engagement letters that clearly state what services will be rendered as part of the engagement. Also important in such letters is a clarification of what the engagement is not designed to do. This will help avoid differing points of view, commonly referred to as the “expectation gap.”

Firms rendering bank reconciliation services should consider using the suggested engagement letter language (see sidebar). The wording clearly acknowledges the nature and extent of the services being rendered, and it identifies the limits of the services. Using this language may also provide opportunities for additional CPA services.

If you have any questions, please call Camico at 800-652-1772 or e-mail your inquiry to lp@camico.com.