Prevention is better than cure

Claims against accountants and auditors seem to be an inevitable part of professional life insurance policies are, after all, a source of funds for creditors when it all goes wrong and the liquidator has been called in.  Increasingly the class action law firms are also looking for a piece of the action on behalf of shareholders after a sudden drop in share price. 

The ICAEW's February Economia magazine published an article The Best Defence, which touches on a number of aspects of professional negligence suits that we have seen in our practice as forensic accountants.  It surveys situations that can increase the risk of a dispute erupting, such as complex areas of the audit being done by inexperienced staff, and lack of clarity surrounding the terms of the engagement, which can lead to the client relying on informal communications from their accountant which turn out to be inconsistent with the final report or to the client receiving a surprise bill for unanticipated work.

The impetus for the article was the issue by ICAEW in October 2015 of revised guidance on Managing the Professional Liability of Accountants.  The paper takes members through a series of areas and looks at how to minimize their risk.  It looks at client and engagement acceptance, the importance of the engagement contract and the implications of electronic communication, and risks that can arise during the engagement.  Its guidance is as applicable to professional accountants around the world as it is to ICAEW members.

Under risks inherent in client acceptance, the paper suggests that practitioners consider issues such as the reputation and integrity of the client, and the client's expectations do they align with what the accountant can provide with the resources available to him or her?  In an increasingly globalized world, an overseas client, with all operations and records overseas, may be seeking a listing on an established stock exchange to lend respectability to a venture.  The auditor may not be able to access the underlying records with sufficient confidence to be able to sign an unmodified audit opinion.  Either situation in an audit situation can result in a limitation of scope that makes it impossible for the practitioner to do the audit.  We have seen more than one instance where the auditor has been prevented from looking into the private side of a client business and so has not understood the full impact of related party transactions until the client has collapsed and the liquidators investigations have started.