An analysis of malpractice claims for 22,000 CPA firms reveals the most common mistakes in audits of non-public companies. The data comes from claims filed with Continental Casualty Co. (CNA), the underwriters of the AICPA professional liability insurance program.
The main causes of claims and their relative frequency are:
- Technical standards violations - 63%. Almost half these claims involved improper inventory valuation. More than one-third involved representations about the collectibility of a particular receivable or class of receivables.
- Failure to detect defalcations – 20%. Most of these claims arose from audits of not-for-profit organizations and closely held and government entities.
- Failure to include appropriate disclosures on the face of the financial statements or in the footnotes – 13%. Most of these claims involved the classification and nature of a security the client held, such as derivatives or loans to related parties.
To protect themselves against malpractice claims, firms are urged to turn down any engagements for which they don't have the necessary industry expertise. CNA's analysis by industry showed disproportionate shares in manufacturing and financial services businesses, especially insurance companies. It concludes only CPA firms with extensive training in auditing insurance companies should accept such engagements.