Minding the Expectation Gap: Minimizing Liability for Failure to Detect Fraud

Source: Journal of Accountancy 

The “expectation gap” refers to the disconnect between a CPA's actual responsibility to detect fraud and theft and the public's perception of the CPA's responsibilities. Client claims for failure to detect fraud or theft can arise in any setting, including “low-risk” engagements such as tax compliance or bookkeeping.

There are several steps CPA firms should take to minimize their exposure, including:

• Prepare engagement letters for all engagements, carefully spelling out the scope of work and the relative responsibilities of the firm and of management. This helps close the expectation gap and provides ammunition for defending professional liability claims.
• Regularly assess client risks throughout an engagement.
• Stay within the scope outlined in the engagement letter.
• Be aware of fraud warning signs, apply professional skepticism, and if you observe any red flags or weaknesses, report them to the client.
• Document communications with clients, particularly those involving suspicious activities or internal control issues. 

For the complete article, read “Failure to detect theft and fraud: It's not just an audit issue.” 

From Journal of Accountancy, February 2014, www.journalofaccountancy.com/Issues/2014/Feb.