Guest Author - Consuelo Herrera, CAMS, CFE
Accountants are expected to deliver high quality services. With each financial scandal public skepticism and distrust raise, and simultaneously, clients become aware of professional responsibilities.
Abiding professional standards is no longer a mandate of professional organizations. It is a public request that entails a potential source of legal liability when ignored.
The regulations of the Sarbanes-Oxley Act imposed higher oversight on accounting firms. After the debacle of Arthur Andersen, LLP, many well known firms have been penalized with economic fines and corporate penalties.
The common law describes three instances in which accountants may be liable to clients:
∑ For breach of contract
∑ For negligence
∑ For fraud.
A breach of contract arises when an accountant promises to perform his or her contract within certain time period and, without any justification, fails to do so. If for instance, Life Improvement Services, Inc. hired an accountant to perform an analysis of financial statements with the purpose of evaluating a given course of action. The contract stated a definite deadline, October 14, 2007. That date arrived and Life Improvement Services, Inc. did not hear from its accountant. After several messages requesting the analysis object of the contract, this organization found out that nothing had been done. It triggered the firing of that accountant. Immediately thereafter, Life Improvement Services Inc. hired another accountant who charged higher fees but delivered the services as stated in their contract.
The former accountant could be held liable for the expenses incurred by his or her client in hiring another accountant, for liquidating damages that could have been imposed on the client for its failure in meeting this deadline, and for any other reasonable and foreseeable monetary losses that arise from the professionalís breach.
According to Westís Business Law, to prove negligence, the following elements must be present:
∑ A duty of care existed
∑ A duty of care was breached
∑ A plaintiff (client) suffered an injury
∑ The injury was proximately caused by the accountantís breach of the duty of care. A proximate cause is a legal cause that exists when the connection between an act and an injury is strong enough to justify imposing liability.
Negligence arises when an accountant does not conform to Generally Accepted Accounting Principles, GAAP or when he or she acts in violation of ethical standards spelled out in professional codes, state statutes, or other regulations. Members of the American Institute of Certified Public Accountants, AICPA, must follow the pronouncements of professional ethics, which provides guidelines concerning the scope and application of rules of conduct.
For an accountant to be liable for fraud, the following elements must present:
1. A misrepresentation of a material fact has occurred
2. An intent to deceive exists
3. The innocent party has justifiably relied on the misrepresentation
4. The innocent part must have been injured to recover damages.
Every day, the media are plenty of cases where accountants, CFOs, CEOs, are involved in misrepresentations in financial statements. Shareholders have made decisions based upon the financial information provided. Later, they found out that the information was misleading and inaccurate, and as a result, their investments are worthless.
Re-gaining public confidence in the accounting profession means a commitment of each accountant to fulfill the terms of each engagement, striving to deliver his or her services with the highest level of professional standards.