Title: Failure to Detect Theft and Fraud: It's Not Just an Audit Issue
Abstract: Commonly referred to as the expectation gap, a disconnect sometimes exists between a CPA's professional responsibility for detecting theft and fraud and the general public's perception of a CPB2s duties. The AICPA Professional Standards for audit, review, and compilation services include a responsibility to inform the appropriate levels of management if any information or evidence comes to the CPRs attention indicating a fraud may have occurred. However, claims made against CPAs in the AICPA Professional Liability Insurance Program alleging failure to detect theft and fraud emanate from all types of engagements, including those generally regarded by CPAs as low-risk, such as bookkeeping or tax compliance services. In such cases, plaintiff attorneys may contend that the CPA failed to exercise due care in accordance with Article V of the Principles of Professional Conduct, which are included in the AICPA Code of Professional Conduct. Lawyers may allege that CPAs have a duty to identify and inform clients of fraud red flags such as suspicious activities or internal control deficiencies. While adherence to professional standards assists CPAs in defending these types of claims, there is no guarantee that such a defense will be successful. CPAs may believe that longtime clients would never assert such a claim against them. However, a congenial working relationship can take an abrupt turn when fraud is discovered. Clients then may question why a CPA didn't discover the fraud earlier or bring matters to the client's attention that could have prevented it. To illustrate how a CPA can get tangled up in a client's fraud, consider the following scenarios based on real-life claims: Scenario I. A CPA was engaged to perform tax compliance and tax planning services for a recruiting agency To understand potential yea-end tax implications, the CPA summarized select income and payables accounts and discussed trends with the owner. The CPA also received monthly bank statements and bank reconciliations. The controller, a longtime employee of the agency, embezzled more than $1 million by writing checks to himself, reporting them as business expenses, and destroying the canceled checks (or scanned copies of them) when the bank statements were received. The owner brought a claim against the CPA for failing to detect the embezzlement. Expert review of the engagement noted that the controller had unmonitored access and responsibilities in accounts payable and that the trend analysis the CPA performed noted unusual fluctuations in expense accounts. The plaintiff's attorney argued that the CPA should have identified the trend fluctuations as a red flag and brought this and the internal control weakness to the owner's attention for further investigation. In defense, the CPA, s counsel noted that the CPA received the bank statements for the sole purpose of understanding the tax implications. Scenario 2. A CPA firm compiled annual financial statements for a local wine producer. The firm sued the client for outstanding fees, and the client countersued, alleging failure to detect a high six-figure embezzlement perpetrated by three of its employees, all of whom colluded to create false wire transfers and payroll checks. The CPA firm's invoices, which were produced during the lawsuit's discovery phase, indicated that the firm performed a review of financial statements, made changes in financial statement classifications and general ledger adjustments, and completed bank reconciliations. CPA firm representatives also worked extensively on-site with the employee/embezzlers and were involved in the company's day-to-day financial operations, but they did not discover the fraudulent wire transfers or payroll checks. In both scenarios, the lack of an engagement letter memorializing the scope and limitations of services performed and management's responsibilities was detrimental to the CPRs defense. …
Publication Year: 2014
Publication Date: 2014-02-01
Language: en
Type: article
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Cited By Count: 1
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