Title: The Pitfalls of Assuming Management Responsibilities
Abstract: Defending professional liability claims is difficult when practitioners assume responsibilities beyond the scope of their engagement. The difficulty in defending against a claim increases dramatically if the CPA undertakes activities considered to be the responsibility of and if the client, based on the CPA's words and actions, believed it could rely on the CPA to perform what was generally understood to be an internal management function. Doing so provides an opportunity for plaintiff counsel to assert that the CPA have known better. So, how easy is it to cross the line from service provider to being perceived as a member of client management? The following hypotheticals, which are based on the claim experience of the AICPA Professional Liability Insurance Program, provide examples: Scenario 1. For several years, a CPA provided bookkeeping and compilation services to a small but growing construction company. The CPA's engagement letter listed the client's responsibilities, including review of a monthly payment register and preapproval of invoices exceeding a specified threshold. As business grew, the owner had little time available to oversee the CPA's activities and increasingly relied on the CPRs experience with and knowledge of the company's operations. Wanting to help the busy owner, the CPA told the owner that he would take care of things, stopped sending the register for review, and paid bills as they became due, even if they exceeded the specified threshold. The owner subsequently discovered that his assistant had established several fictitious vendors and created false invoices, which were processed and paid by the CPA. He brought a professional liability claim against the CPA for failing to detect the embezzlement. Scenario 2. A small not-for-profit organization engaged a CPA firm to provide bookkeeping, compilation, and strategic financial consulting The firm's standard engagement letter for write-up and compilation services was used and included a reference to the provision of other financial consulting services as considered necessary, but it failed to define those Because the organization had no internal accounting resources, the board of directors requested that the CPA attend its monthly meetings to advise on the organization's finances. The CPA agreed to attend. At one meeting the board discussed and decided to invest in a real estate parcel. During this discussion, the CPA was distracted by another client matter and checked his email frequently. The real estate subsequently declined significantly in value. The client sued the CPA, alleging he failed to provide advice regarding the investment risks in connection with his attendance and participation in the board meetings and provision of other financial consulting services. THE ISSUES Expectation Gap An expectation gap may be created when the CPA is perceived by clients to be a member of management who has greater authority than that provided in the engagement letter. A client may assume the CPA is responsible for detecting theft or fraud, regardless of the type of service provided, or that the CPA should advise on all matters of which the CPA has knowledge, even if those matters are not covered by the engagement letter, as demonstrated in the previous scenarios. Professional liability risk is heightened when third parties are involved. A client may ask the CPA to attend a meeting with a third party, such as a lender, to help explain the components of financial statements compiled by the CPA. This may lead the lender to perceive and expect that the CPA is acting as a de facto CFO or controller, which may create a privity relationship between the CPA and the lender. Such a relationship may permit the lender to bring a claim against the CPA. Fiduciary Standard of Care Company management, including its directors and officers, owe the organization the fiduciary duties of care and loyalty--meaning they must act in the best interest of the organization they serve. …
Publication Year: 2013
Publication Date: 2013-11-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot