Types of Liability
Auditors are potentially liable for both criminal and civil offences. The former occur when individuals or organisations breach a government imposed law; in other words criminal law governs relationships between entities and the state. Civil law, in contrast, deals with disputes between individuals and/or organisations.
- Criminal offences: Like any individual or organisation auditors are bound by the laws in the countries in which they operate. So under current criminal law auditors could be prosecuted for acts such as fraud and insider trading.
- . Civil offences: There are two pieces of civil law of particular significance to the audit profession; contract law and the law of tort. Under contract law parties can seek remedy under certain terns or contractual obligations. Under the law of tort auditors can be sued for negligence if they breach a duty of care towards
- Get rid of high risk clients and troublemakers. Continuing to serve clients that are risky, that require constant hand-holding, that are uncooperative or that argue over fees limits productivity of CPA firm personnel and often creates a “crisis-oriented” culture. It also builds a client portfolio of less-than-quality clients and increases the likelihood of lawsuit!
- Make sure in-charge accountants and engagement leaders know what they are doing. Due to employee turnover, business growth or other reasons, staff personnel are frequently promoted to these leadership positions without adequate experience and training. The strongest defence against the likelihood of performing substandard work is the knowledge and experience of in-charge accountants and other engagement leaders. Training investments are the best malpractice insurance!
- Tailor engagement practice aids to meet the needs of clients. Professional judgment is now required for both audits and reviews. Professional judgment cannot be demonstrated by simply completing all forms and checklists from a canned set of practice aids. Documentation of thinking and reasoning is required!
- Preach professional skepticism. Familiarity with a client can enhance professional judgment. Excessive familiarity can diminish professional skepticism. Staff personnel must be taught how to develop a questioning attitude and to maintain a high level of professional skepticism on all engagements.
- Carefully manage cookie-cutter approaches to audits. Standard approaches to attest engagements without carefully considering the facts and circumstances of each can increase the possibility errors or fraud going undetected. Particularly for engagements in certain industries such as donor supported projects, small broker dealers or other specialised entities, standard approaches can increase efficiencies. On the other hand, auditors and accountants should continually be alert for unique policies, procedures, risks and other issues that may require special attention.
- Engagement leaders should never delegate their quality control responsibilities. Even when staff personnel are highly qualified and experienced, engagement leaders are responsible for managing engagement planning, performance and completion (ISC 1; ISA 220). The continual involvement of the engagement leader ensures the work is performed correctly and increases engagement quality. This responsibility for audit engagements cannot be transferred to audit managers or other non-engagement partners. Only engagement heads or partners have responsibility for the audit and its reports.
- Engagement leaders should deliver and discuss engagement letters. Engagement letters are contracts, the enforceability of which depends on both parties understanding the contents. Engagement letters understood by both parties can eliminate lawsuits against CPA firms due to misunderstandings. The engagement leader can obtain information about possible fraud, negative economic effects and changes in an entity’s operations during discussions with client CEOs or CFOs. Communicating this information to engagement personnel can help ensure engagement quality, increase efficiency and reduce professional liability!
- Restrict the use of reports in high risk circumstances. Normally, restrictions on the use of reports are appropriate when the accountant or auditor has concern about unqualified or unauthorised persons utilising financial statements and footnotes. For reports on financial information in specialised industries, and for other high risk circumstances, professional liability can be reduced by restricting the use of audit, review or compilation reports.
- Offer the lowest level of assurance on supplementary information whenever possible. Compiling supplementary information for reviews and disclaiming assurance on supplementary information for audits reduces the amount of the accountant’s or auditor’s work and also limits professional liability.
- Quality control policies and procedures should be integrated into engagements. These policies and procedures are intended to produce high-quality engagements and to decrease exposure to legal liability. Engagement documentation should contain evidence of how applicable quality control policies and procedures were applied on the job. This documentation can reduce time spent by peer reviews and ensure compliance with professional standards.
- Compliance on Audit quality: There are a number of ways in which audit firms can manage their exposure to claims of negligence. Perhaps the most obvious is not being negligent in the first place. In practical terms this means rigorously applying Accounting and Audit Laws and Regulations, stringently applying International Standards on Auditing and undoubtable compliance with the Code of Ethics for Professiona l Accountants and paying close attention to the terms and conditions agreed upon in the engagement letter.
- Disclaimers of liability: Because potential exposure of auditors to litigation from third parties to whom they have not disclaimed, liability it has become common to include a disclaimer of liability to third parties in the wording of the audit report.
Managing Exposure to Liability
A lawsuit alleging deficiencies in engagement performance, whether the allegations are true or not, can damage a CPA firm irreparably! Here are 10 ways a CPA firm can reduce professional liability in its accounting and auditing practice: