With less than three weeks to the tax filing deadline, your clients might be scrambling to furnish all of their receipts and documents of transactions for their returns. But you might come across items that are suspicious and could even be fraudulent.
AccountingWEB presented some questions to Randy Wilson, a senior manager in the Chicago office of Cendrowski Corporate Advisors, on what accountants can do to protect themselves and their firms. He offered some tips on how firms should question suspicious issues and what steps to take in ensuring best practices to combat fraudulent activity. Wilson has more than two decades of experience in internal corporate and government investigations, fraud analyses, embezzlement detection and prevention, risk management analysis, and forensic accounting investigations.
AW: What are some of the steps an accountant or tax expert should take after finding out, or has evidence, that a client has committed fraud purposely (or inadvertently)?
Wilson: The first key step to take, once a client fraud has been discovered, is for the outside accounting professional to review your firm’s engagement letter with that client to verify your terms and conditions. It is also advisable to seek out partners within your firm that review firm risk and to consult with your general counsel to discuss potential exposure. Simultaneously, determine if your firm is providing other services (audit, consulting, etc.) to the client, as your firm may also have imputed knowledge of facts that could potentially tie you to the fraudulent activity.
Communication within your firm is important. Make sure that all engagement teams are in contact, they are questioning suspicious issues, and continually assessing the clients and the firm’s risks.
AW: Would it be particularly sensitive or challenging for the accountant to approach the client of misconduct if there had been a long-term business and friendly relationship with the client?
Wilson: Once you have discovered the client’s fraud, you should consider approaching the client to discuss your finding(s). Determine if you can assist the client in resolving or mitigating the issue. This may entail a new engagement letter and scope of services. Depending on the circumstances, you may need to resign from the engagement. If so, document your decision and send a letter to your former client clearly and succinctly explaining the reason(s). If your firm is able, assist your former client in meeting any pending deadlines and/or finding them a new accountant.
While the tax preparer is not a fiduciary, a long-standing relationship with a client may increase your perceived standard of care. Sometimes, the longevity of your relationship with the client makes you privy to information beyond the tax return preparation and may complicate an exit from the engagement.
AW: What are some of the best practices for accountants to protect themselves from fraudulent practices internally, i.e. a fellow accountant who conducts himself unethically like making false deductions to lessen a client’s tax liability?
Wilson: Assess the qualifications of your team. Make sure that your assigned team is suited to the client. In order to manage your firm’s risk, develop, implement, and monitor a robust peer review system that incorporates quality control steps specific to tax preparation. The next step is to educate your partners, staff, and administrators. Make sure they are following the quality control steps. Have everyone in your firm acknowledge annually the policies you have developed.
AW: What advice would you give small and medium-sized firms to ensure that best practices are maintained?
Wilson: The key to good relationships with clients is consistent communication. Listen to what your client wants, advise them as to what the engagement will entail, and then document it accurately. Accounting firms are often seen as deep pockets (insurance policy). A malpractice suit will cost your firm time, money, and may adversely affect your reputation. Take some simple steps to protect your firm:
Craft a good engagement letter. Prepare a new one for each engagement and update it on an annual basis.
Meet with your client to explain the clients’ responsibilities for the engagement. Make it clear that your firm will not be verifying the client’s data, and that your firm is not being engaged to detect fraud. An engagement to assess and mitigate fraud would be separate and distinct from the tax engagement.
In order to limit your firm’s liability, limit your engagement scope to only those tasks that need to be accomplished and don’t go beyond those tasks without an updated engagement letter. Additionally, limit your exposure to the amount of your fees, if possible.
Develop a document retention system and talk about it in your engagement letter.
Don’t overstate your qualifications in your firm brochures or online materials.
Train your partners and staff on the use of your tax software package(s).
Maintain a firm calendar in order to track and meet deadlines.
Thoroughly document your clients’ issues, your research, and your conclusions.
Screen new clients and be prepared to pass on the engagement. Perform some due diligence by talking to your partners, talking to predecessor professionals, and doing some online research.
Make sure the client’s business and issues are within your firm’s expertise.