Bookkeeping—Your Malpractice Achilles Heel?
She thinks he’s picking up the dry cleaning. He thinks she’s doing it. That’s an expectation gap. After a few cross words, all may be forgiven and forgotten. But expectation gaps about bookkeeping services are another story entirely. They can--and do--lead to malpractice lawsuits against accounting firms.
In fact, according to Continental Casualty Company, the underwriter of the AICPA Professional Liability Insurance Program, 11% of accounting malpractice claims stem from compilation and bookkeeping.
For example, CPA firms have been sued for failing to detect fraud because they didn’t examine cancelled checks. This wasn’t part of the engagement, but the clients expected it to be done as part of the bank account reconciliation process. That nasty “expectation gap” could be an accounting firm’s Achilles heel.
Expectation gaps arise, says CPE Link instructor Russell Madray, because there’s a lack of authoritative standards or definition for “bookkeeping.” Many smaller CPA firms add bookkeeping to their menu of services because the revenue is steady, the work isn’t complicated and they think risk is low. But risks do exist and they are growing, warns Madray. Disputes over engagement scope are just one type of malpractice claim against CPAs who perform bookkeeping services. Others include: general ledger errors, misappropriation of client funds, failure to disclose a conflict, and failure to detect fraud or theft. “Once you’ve recognized the risks of providing bookkeeping services, you can employ risk management techniques to help reduce your exposure to claims, says Madray.
by Sue Anderson - Based on 30 years of experience in continuing education for accountants. Currently program director for online CPE provider, CPE Link. Formerly with the California CPA Education Foundation managing key operational areas including marketing, program development, and distance learning.