A CPA firm provided audit and tax services to a technology consulting company that evaluated systems, made recommendations, and often sold hardware and software to customers throughout the country. The client collected sales tax and filed income and sales tax returns only in its home state. Tammy, the CPA firm's tax engagement partner, discussed potential nexus issues and related income and sales tax implications with the CFO. The CFO acknowledged Tammy's advice but did not feel it was necessary to address the issue any further. As a follow-up and good risk management protocol, Tammy sent a letter to the client about the issue and her recommendations but never discussed it with Alan, the engagement audit partner.
A few months after the audit report was issued, the client was sold to a supplier. The successor audit firm for the new owner determined there was a significant unrecorded sales tax liability. As a result, a substantial purchase price adjustment and reissuance of prior-period financial statements was necessary. Despite providing what separately seemed like good services, failure of the tax and audit teams to communicate resulted in a claim against the firm for failure to discover a misstatement in the financial statements.
The partners in a firm are considered agents of the partnership, and under the general principles of agency law, what is known by any partner of the firm is presumed to be known by all the firm's partners. This doctrine is called "imputation." When multiple services are delivered by different members of the CPA firm, the risk of a failure in communication increases.
What can be learned from Tammy and Alan's experience? Consider the following topics to instill a culture of teamwork at your firm.
Consider tone at the top
Tone at the top is linked to management's commitment to ethical behavior. Broadly, the team follows the example set by a leader. In the context of this article, it refers to a commitment of firm leadership to collaboration and support of holistic client service teams. When a firm's partners focus on a team approach, staff generally follow. Firms with aligned goals and values throughout the organization are likely to experience success.
We can infer based upon the actions of Alan and Tammy that working as a unified client service team may not have been a priority. If the appropriate tone had been established by firm management, Alan and Tammy may have consulted on...