10 Ways to Reduce Professional Liability on Audits, Reviews and Compilations
A lawsuit alleging deficiencies in engagement performance, whether the allegations are true or not, can damage a CPA firm irreparably! Errors and omissions insurance providers have focused on ways to reduce accountants’ and auditors’ professional liability for many years. Still, many CPAs practicing for more than a decade are likely to have been sued at least once. Here are 10 ways a CPA firm can reduce professional liability in its accounting and auditing practice:
1) 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!
2) 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 defense 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!
3) 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!
4) 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.
5) 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 HUD supported projects, small broker dealers or other specialized 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.
6) 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. The continual involvement of the engagement leader ensures the work is performed correctly and increases engagement profitability!
7) 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!
8) 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 unauthorized persons utilizing financial statements and footnotes. For reports on financial information in specialized industries, and for other high risk circumstances, professional liability can be reduced by restricting the use of audit, review or compilation reports.
9) 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.
10) 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.
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