THE LIABILITY OF AN ACCOUNTANT
Recently, the question of liability has become more prevalent in the practice of public accounting. The AICPA (American Institute of CPAs) has been lobbying for liability reform in cases involving negligence or fraud committed by public accountants. So, being an accounting major myself, I wanted to write about the ongoing fight involving liability reform in public accounting.
Contrary to some belief, accounting is not a “cakewalk” career. Accountants do not sit at a desk one-hundred percent of the time crunching numbers that always add up perfectly. In fact, accounting fraud is one of the largest scandals found today. When an accountant enters an engagement with a client, who are they liable to? Certainly not
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If the accountant makes a false statement of fact, either knows the truth or recklessly disregards it, or if the client justifiably relies on the statement, the accountant would be liable for fraud.
Accountants assume a large responsibility to their clients. They enter a contractual agreement, known as an engagement letter, and use engagement letters to minimize the risk they assume under the contract. Many engagement letters include memos limiting the recovery. Accountants expressly agree to do a project by a specific date, and imply that the work will be completed carefully. Like I said before, if an accountant breaches the contract, they can be found liable for damages. Another liability that I didn’t really mention was the trust that the clients give to their accountants. They are liable to keep the information confidential and to use it only for the client’s benefit. It is the accountant’s responsibility to be diligent with not only confidential client information, but also providing services with care, thoroughly, and to follow the ethical and technical standards provided to them by the GAAP (Generally Accepted Accounting Principles) and the AICPA. In a case of Mattco Forge v. Arthur Young, there was a serious question of an accountant’s liability to client. In the 1980s, Mattco Forge began a lawsuit against General Electric, claiming discrimination against the company while they awarded GE contracts.
* Common history shows that prior to PCAOB, the accounting industry was self-regulated through the American Institute of Certified Public Accountants (AICPA). Create an argument that the public is either better or worse off since PCAOB assumed the
The Auditor, an instructional novella written by James K. Loebbecke, tells the story of Jack Butler, a man from the San Francisco Bay area, who goes to college, majors in accounting, and goes to work for a large accounting firm referred to as “The Firm.” The story is loosely based upon the real world experiences of the author, and is written to give students a look into the world of public accounting that goes beyond a textbook. The Auditor not only gives students a chance to follow Jack Butler’s journey up the company ladder at The Firm, but also reiterates the relative importance of conventional lessons learned in school.
“ In order to prevent fraudulent financial reports and statements, the American Institute of Certified Public Accountants(AICPA) has created ethical standards” (Ethical standards in a financial statement, 2011). These standards aim to make financial professionals accountable for their accounting practices. This includes the integrity of financial reporting and ensuring financial reporting is done fairly and factually. Financial accountants and professionals should maintain professional integrity, objectivity, and independence to reduce the risk of resulting legal action, loss of profits, and a poor reputation if improper financial reporting is done (Ethical standards in a financial statement, 2011).
According to section 140.2: A professional accountant should maintain confidentiality even in a social environment. The professional accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a close or immediate family member [ (Chan, 2004) ].
Accountants should always carry out the public responsibility, meaning they have a responsibility to ensure that the accounting functions are performed to the highest possible standards and the information which an organisation provides for its stakeholders is true and accurate. To reach the goal of improving the performance of accountants, there might be several steps to undertake. There should be on-going education to keep abreast with the existing and emerging
The Model of Trust Enhancement was established to enhance and maintain the public’s trust in the accounting profession. Over the last two decades, the ethics of the accounting profession has been questioned and public trust destabilized, in particular for auditors, due to the Enron debacle. The fact that an auditing firm would assist their clients with publishing an inadequate set of financial statements shows their willingness to violate laws and regulations (Sims & Brinkmann, 2003). According to the textbook, “Because trust is essential, even the appearance of an accountant’s honesty and integrity is important. The auditor, therefore, must not only be trustworthy, but he or she must also appear trustworthy” (Duska, Duska & Ragatz, 2011, p. 116). The majority of statements filed inadequately have a substantial impact on the credibility of the accounting profession as a whole. Sullivan (n.d.10) states that a CPA must possess a high level of trust, by applying professional judgment and enhancing the three trustworthy characteristics (ability, benevolence, and integrity) when resolving accounting ethics dilemmas (slide 3).
Accountants are relied upon to be trustworthy and maintain high ethical standards. It is because of the nature of the profession that puts them in a position of trust with people who rely on their professional judgment and guidance in making decisions. These decisions are extremely important in accounting and more so that companies that have high ethical standard or main good ethical culture spend enormous time to train the staffs about the conduct that is expected of them.
Civil liability is expressed within Section 11, which states that an accountant is liable for documents that they certify that contain any untrue statements or missing information.
Integrity – Accountants should always ensure that they are honest and straightforward in their activities with every instance that they have clients. They should always maintain the lines of duty and maintain business relationships during all official duties (Nobes, 2015).
Ethics in any industry is important, but for Accounting professionals and those in need of their services, it is a particularly stressed element. Information provided by accountants is used to make major decisions, including investing, downsizing, expanding, etc, so accountants are expected to be competent, reliable, and have a high degree of professional integrity. Because of these high expectations, the professional accountancy industry, like many other professions, has adopted professional codes of ethics (Woelfel, 1986). These ethical codes go above and beyond the requirements for state or federal laws and regulations. There are several professional organizations within the
Accountant Fraud is done in many ways but the most common way is falsifying statements to mislead people on the actual stability of a company.
110.1 - The principle of integrity imposes an obligation on all Members to be straightforward and honest in
Investigation and discipline of registered public accounting firms for violations of relevant laws or professional standards.
witnesses also are included in the case. The primary issue in this case (drawn from actual
II. Main Point #2. Contrary to popular belief, Accountants, and the tasks that they perform, are an important part of most people’s everyday life.