Audit Related Accounting Malpractice

Tax preparation accounted for almost 60% of accounting malpractice claims, while audit claims tend to be much more severe and at a higher cost to the CPA firm. Claims from public company audits made up 2% of claims last years, as audits of nonpublic organizations accounted for 14% of claims.

Audit claims are brought on by three types of claimants:

  1. Client business, which often assert claims arising from mismanagement or fraud by employees or management.
  2. Shareholders, who pursue claims seeking to recover lost investments and returns.
  3. Lenders, who allege reliance on the auditor's report in initiating and extending lines of credit and seek to recover their losses when a client business fails.

Approximately 40% of all audit claims allege that either the auditor failed to detect fraud or failed to advise the client of internal control weaknesses that should have been corrected to reduce the risk or fraud.

Here are some of the most common problems found in audit claim investigations:

  1. The auditor failed to exercise adequate professional skepticism regarding information and representations received from the clients. In most cases management representations were accepted without evaluating their rational and without required supporting information and documentation.
  2. Data was manipulated by the client for the sole purpose of inflating financial results. In some cases this was done by the owner of the business in order to avoid loan covenant violations that would affect their line of credit. Other cases involve a controller or sales manager that committed fraud for the purpose of generating bonuses or covering up theft.
  3. The auditor did not adequately plan the engagement with the client. Inappropriate audit plans were used, often because the auditor lacked relevant industry experience and did not use practice aids appropriate to the client's industry.
  4. Assets were overvalued, resulting in errors in the financial statements. These assets are typically intangible assets such as leasehold interests, customer lists, subscription agreements, service contracts, or goodwill. Often the business client will acquire the assets in a merger or acquisition of another company.

Click here to view a list of general types of audit claims

Click here to view a list of general types of audit claims by industry

 

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