Preventing Liability from Client Claims

Source: Accounting Office Management & Administration Report

The following summary is from AOMAR’s report on the Association for Accounting Administration’s annual conference in Indianapolis.

The tax area is the biggest target for claims (55 percent), but audit claims (10 percent) are larger. Compilation and review, consulting, fiduciary, etc. make up the rest.

Twenty-five percent of tax claims are for late filings, and 23 percent are for preparation errors.

Engagement letters are important preventative measures, but it is difficult to get them for individual returns. An alternative is a letter to clients asking them to sign the engagement letter, warning that failure to sign will be considered an acceptance of its terms, which will be enforceable in case of a claim.

Other measures include:

• Keep written records of all recommendations. Follow up with letters that include reference to possible negative outcomes.
• Provide written filing instructions that are comprehensible.
• Obtain acknowledgement of receipt of documents.
• Observe danger signs—staff illness, personal issues, client complaints about staff missing appointments or failing to return calls.
• Train and mentor.
• Encourage staff to express their worries about clients.

Fraud claims are costly to audit practices. Juries hold CPAs to standards beyond those publicized by the profession. Forty percent of fraud claims allege failure of detection. Other significant reasons for audit claims include investment losses and lender reliance. Auditors should be aware of the following danger signs:

• Poor records.
• High turnover in the accounting department.
• Uninvolved absentee owners.
• Late financial statements.
• Moves from bank to bank.

Risk avoidance practices include:

• Being certain the firm is qualified to perform the engagement.
• Having detailed plans.
• Keeping audit manuals up-to-date, and conducting training classes.
• Keeping written records of client communications.
• Screening new clients.
• Maintaining vigilance toward internal control weaknesses.
• Viewing inventory differences, large year-end adjustments, and major credit increases with skepticism.
• Avoiding complacency about management representations on receivables.

To read other articles on this subject from our archives, click on any of the following links:

From Accounting Office Management & Administration Report, March 2007, p. 1. For subscription information contact Institute of Management & Administration, Inc., 3 Park Avenue, 30th Floor, New York, NY 10016-5902. One-year subscription $399. 212-244-0360, [email protected]. For the complete article click here.