Client Admits to Wrongdoing - Ethical Implications?

Do you ever have clients say something like "We did some [accounting] stuff wrong last year (month, week, etc.). Should we tell you about that?" Aside from laughing at the irony that they have already disclosed that they did something wrong by asking, what should a practitioners' response be to this? The first answers that come to mind are:

  • Disengage from the client and terminate the client services
  • Tell them to disclose everything to you so you can be aware of all the facts and circumstances when providing them with professional services
  • Tell them to disclose everything except illegal acts, for which they should seek privileged legal counsel
  • Scenery from Copperopolis MVC-064F
    The first response seems pretty drastic considering that in most cases the client isn't attempting to be deceitful or act unethically, they are just uncomfortable having to admit to having done something wrong. However, it would be wise to consider the circumstances around the client admission further before writing off this response. Factors such as whether the errors were intentional, concealed, ignored, illegal or in violation of regulatory requirements all point to situations where the errors may be more than just 'screw-ups' that we can advise our clients on how to correct.

    The second two responses both presume that we think we should continue on with the client engagement. In either case we want them to disclose the errors to us so we can correctly assess the accounting and tax implications of the matter. However, since our communications are not privileged, when we communicate this caveat to our client how can we be sure that they are fully disclosing everything we need to know regarding the error? Basically, we have to choose between either having them tell us everything, which is bad advice for them if they have committed any illegal acts or have them tell us everything with the caveat of illegal acts which then puts us in a position of not knowing whether we have all the facts and circumstances of the matter at hand. What would you do?

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    by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

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