Protecting against claims of failure to detect theft.

Author:Khanna, Samiha

Professional liability claim data for claims asserted against CPA firms in the AICPA Professional Liability Insurance Program in 2017 show that--as in previous years--many clients believe that a CPAs duties include spotting evidence of theft or fraud in company records, regardless of the type of service the CPA firm is engaged to deliver. This erroneous belief is a major concern for CPAs who could face professional liability risks due to the misperception.

"Most CPA firm services don't have any responsibility related to fraud detection," said Sarah Beckett Ference, CPA, a risk control director for CNA. "Nevertheless, we see claims in all areas of practice, including tax, bookkeeping, consulting, and other services." (See the chart, "Unlikely Claims.")

These claims may arise, in part, due to a mismatch between the client's perception of the duties of CPAs and their actual responsibilities, Ference said.

"The public's expectation of what's involved in CPA services may be different from what is required by the professional standards," she said. "We often call this anomaly the expectation gap."

Although claims asserted against CPA firms for failure to detect theft or fraud may be unsuccessful, being subject to a claim, irrespective of its merit, is a hassle. "It still takes time away from your firm," Ference said, so it's in a firm's best interests to take measures to help avoid--or at least improve the defensibility of--any claims, which includes managing the client's expectations and maintaining detailed documentation.

All firms should use engagement letters on every engagement that outline the services to be provided and the client's and the CPA firm's responsibilities. Where applicable, include a disclaimer that the firm's services are not intended or designed to detect fraud, Ference said.

She offered the following example of an engagement letter provision that could be used for a nonattest service: "Our engagement does not include any procedures designed to detect errors, fraud, or theft. Therefore, our engagement cannot be relied upon to disclose such matters."


It's also important that the firm adhere to its agreement to provide only the services outlined in the engagement letter, and that it doesn't stray beyond that scope by adding any other services without amending the engagement letter, Ference advised, not even for a trusted longtime client.

"An engagement letter helps put a box around the services...

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