Client and engagement acceptance: only a public company audit service concern?

• Author: McFadden, John E.

The demands and risks associated with auditing the financial statements of public companies have changed dramatically over the past two years. The recently publicized financial scandals, coupled with the passage of the Sarbanes-Oxley Act and the adoption of related SEC rules will have a far-reaching impact on the regulation of the accounting profession and on corporate governance.

With these developments, CPAs must be keenly aware of the need to evaluate thoroughly prospective and continuing public audit client relationships and engagements. As indicated in the Statements on Quality Control Standards, (AICPA Professional Standards, QC Section 20.14-16), a CPA firm needs to have policies and procedures in place to provide reasonable assurance that:

* The likelihood of associating with a client whose management lacks integrity is minimized.

* The firm undertakes only those engagements that it can reasonably expect to complete with professional competence.

* The firm considers the risks associated with providing professional services in the particular circumstances.

The November 2001 Risk Management Alert published by the AICPA Professional Liability Insurance Program addressed the demands and risks of performing public company audit engagements (see the Program's Web site at www.cpai.com/audit for this Alert).

But what about other types of new and continuing client relationships and engagement services? Are the same concerns applicable, for example, to tax and consulting engagements for a family business, a not-for-profit organization, or an individual client? Should a CPA be as concerned about these types of clients and services as with public company audit engagements? This article focuses on these questions for individual and non-public company clients.

In brief, the answers to the above questions are both "Yes" and "No"!

Yes, a firm needs to be concerned with assessing and evaluating the integrity of all potential new and continuing clients. And yes, a firm needs to undertake only those engagements that it can reasonably expect to complete with professional competence.

And yes, a firm needs to consider the risks associated with providing professional services in particular circumstances.

But no, the risks are not the same. In many cases, they may be less than those associated with doing an audit engagement for a public company.

Although the quality control standards referenced above do not apply to all CPA services, any firm that is...