What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
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What is required by the Statements on Standards for Consulting Services (SSCS)?
The SSCS requires:
- Competence
- Due Professional Care
- Planning
- Supervision
- Obtain Sufficient Data
- Serve Client Interest
- Agreement: Written or Oral
- Communicate w/ Client
- Objectivity NOT REQUIRED: Independence
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what the accountant will do.
Implied: Accountant performs without negligence.
What are the requirements for an accountant’s liability for negligence?
The requirements for accountant’s liability for negligence are:
- Duty - Accountant must have had a duty to perform with due care exercised by an average accountant.
- Damages - The client experienced actual damages.
- Result/Causation - The damages were as a result of the negligence.
What is an Accountant’s Liability for Detecting Fraud (Under Normal Circumstances)?
It is not the accountant’s job to find fraud and they are not normally liable for not detecting it.
When can an auditor be sued for failing to detect fraud?
An auditor can be sued for failing to detect fraud when:
- A normal audit following GAAS would have detected the fraud.
- An accountant agrees to take on more responsibility than what is required under a normal audit.
- Accountant words the audit report to indicate this greater responsibility.
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s).
Scienter - Accountant commits scienter (intentionally deceiving someone).
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.
What is Scienter?
Scienter is to report something knowing it is false.
- It is characterized by a reckless disregard for the truth.
- It intentionally conceals facts.
What is the Accountant’s Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence.
It is not a defense against fraud.
What is the Ultramares decision?
Accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement and the accountant knew they would be relying on the financial statements.
What is Common Law Fraud?
Common Law Fraud includes:
- Regular fraud
- Misrepresentation of Material Fact
- Scienter
- Damages
- Reasonable Reliance
What is Constructive Fraud?
It is Gross Negligence - reckless disregard for the truth.
CPAs usually not liable for simple negligence, but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
What are the required actions with Discovery of Illegal Activity?
The accountant must report discovered illegal activity to Audit Committee or Board of Directors.
If an illegal activity occurs in a public company that is material, BOD has one day to notify SEC.
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private conversations to a court unless a particular state recognizes such a privilege.
If your client tells you, “Yeah. I cheated on my taxes,” a court could force an accountant to testify about that conversation.
What are the confidentiality requirements of an Accountant’s Workpapers?
- Can be subpoenaed
- Can be looked at by another CPA doing peer review
- Property of the accountant who created them
Note: Source documents supplied by the client must be returned to the client if they request them back even if there is a billing dispute.
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
False. Accountants have no way of auditing an individual’s personal finances and are not required to do so when preparing a return.
When a past error is found in a client’s tax return, what should an accountant do?
If a past error is found, the accountant should inform the client of this error.
Contacting the IRS is NOT required.
If the client won’t fix it, then the accountant should reconsider whether they want to do business with the client.
Name the key responsibilities of an accountant when preparing a tax return.
The accountant must prepare the return in good faith and ask for more information if something is missing.
When recommending a tax position, the accountant should believe that it would stand up under the scrutiny of a tax court.
