Financial statements you can depend on -- they're what all businesses need to measure the success of their own activities and to gauge the financial strength of those with whom they do business.
A good CPA plays a critical role in ensuring a business can have confidence in the accuracy of its financial records. Conversely, poor performance from your outside CPA can spell disaster.
Here are some actions you can take to ensure you know how to catch poor performance before irreparable damage occurs.
• Understand and confirm in writing the scope of services provided by your CPA. Most CPAs will provide you with a detailed engagement letter. Read this letter carefully, and make sure to ask about any details you don't understand. This document will describe what your CPA will do and won't do. It's important to focus on both. Misunderstandings about the scope of service are a leading cause of disputes between CPAs and clients. Carefully defining the scope will help you avoid dangerous misunderstandings about what you are actually paying your CPA to do.
• Understand the type of service your CPA will supply. If your CPA is going to audit your financial statements, be sure you know what that means. Generally, the engagement letter will provide a summary definition, but you should educate yourself on the subject so you have your own understanding of the process. For example, there are at least three different levels of service your CPA can provide when it comes to your financial statement: the audit, the review and the compilation, with the audit being the most comprehensive. Each level of service is distinct and carefully defined. Each provides a very different degree of assurance about the accuracy of your financial statement. As you might expect, with greater assurance comes greater expense.
• Understand how the work is done and by whom. One of the leading causes of accounting malpractice is the delegation of key tasks to younger accountants without adequate supervision. One can easily imagine the economic pressures to have inexperienced staff working on the time-consuming tasks, while more experienced managers simply review their work. This practice can be a means of keeping fees under control, but can also provide the conditions for calamity. As the client, you should understand how your engagement is being staffed and the amount of time devoted by those with greater training over those who are newer to the profession. If what you see does not give you confidence in the quality of the work, you should go immediately to the partner in charge and ask questions until you are satisfied.
• Understand the product. When you receive the CPA's product, it will probably look professional. You must get beyond the appearance. Whether you have engaged a CPA firm to perform an audit or you only need compilation services, educate yourself sufficiently to understand what you have bought. Look beyond the bottom line, and learn how the other information in the statements relates to your business. A Google search easily finds multiple articles that can instruct you. The payoff is that you will be on top of your finances and in a much better position to notice any aspects of the CPA's product that don't make sense. Go with your gut. If it doesn't make sense, ask questions until you get an answer you understand.
Many businesses have occasion to evaluate financial statements provided by others. In extending credit, entering into joint ventures and purchasing businesses, a standard request is to review financial statements. In certain circumstances, CPAs may become liable for negligence to non-clients who rely on their work, but that is cold comfort. If you want to avoid being drawn into a bad deal, then you must evaluate the CPA services provided to those with whom you are doing business.
Consider the following measures:
• Ask to view the CPA's work papers. This will give you an idea of how and by whom the work was performed. You might also want to have your own trusted CPA accompany you.
• Interview the CPA. Form your own judgment about the people who prepared the financial statements.
• Check with the boards. Make sure there is no record of ethical or other misconduct with state CPA boards and professional associations such as the American Institute of Certified Public Accountants (www.aicpa.org).
• Check for litigation. It's worth finding out whether the CPA has been sued before. Your lawyer can do a quick search for red flags.
There is no combination of protections that will shield you completely from exposure to possible CPA malpractice. If it does happen, you may need to resort to the courts. However, by investing a little time in educating yourself, paying attention to the work that is being performed, and understanding how it's done and who is doing it, you will go a long way toward protecting yourself against negligently rendered accounting service.
This guest column was published in the Portland Business Journal on October 21, 2005. http://portland.bizjournals.com/portland/stories/2005/10/24/focus12.html
Related Practice Areas:
Business and Commercial Litigation
Business Associations
