Are You Criminally Liable for Your Client's Fraud?

Source: The CPA Journal

In this article, the authors review the current state of the law regarding a CPA's criminal liability in federal securities fraud and tax fraud cases. Traditionally, the distinction between malpractice and a crime comes down to state of mind. Malpractice generally involves negligence, while criminal fraud requires an intent to do wrong or knowledge that, for example, a financial statement contains a material misrepresentation.

But the doctrine of “willful blindness” blurs the line between malpractice and fraud, potentially exposing careless CPAs to criminal prosecution. To be guilty of fraud, a CPA must know that financial statements are false, but such knowledge is notoriously difficult to prove. Therefore, prosecutors often rely on willful blindness, which allows jurors to infer knowledge if they believe that an experienced, intelligent CPA could not have let financial irregularities pass without knowing that they were a cover for fraud.

For example, in U.S. v. Weiner, 578 F.2d 757 (9th Cir. 1978), “the court explained that a prosecutor need not prove that the auditor actually knew of the financial statement's falsity. It is enough to show that the accountant had reason to be suspicious but deliberately avoided learning the truth.”

The best way for CPAs to avoid criminal liability is to thoroughly investigate any suspicious circumstances or irregularities rather than turning a blind eye.

For the complete article, read “Criminal Liability of CPAs in Federal Securities Fraud and Tax Fraud Cases.”

From The CPA Journal, A Publication of the New York State Society of CPAs, March 2013, http://www.cpajournal.com.