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PROFESSIONAL LIABILITY SPOTLIGHT

Fraud risk applies to

all CPA firm services

By Sarah Beckett Ference, CPA

id you know that, regardless of the service client argued that the CPA had access to credit card
Not just an Dprovided, CPAs face professional liability and bank statements and should have noticed the
audit concern claims asserting that they failed to detect a theft or CFO’s unusual charges and brought them to the
The portion of fraud at a client organization? Did you also know family’s attention. The client also indicated that the
that even if a theft or fraud is below an auditor’s
CPA should have advised them of the risk of fraud
claims asserted
in 2021 against or reviewer’s materiality threshold, the CPA may when the bookkeeper resigned, making segregation
CPA firms in the still be blamed for not detecting it? The disconnect of duties impossible. Finally, since the CPA had
AICPA Professional between a CPA’s professional responsibilities related developed a tight relationship with the CFO and
Liability Insurance to fraud detection and the public’s perception of had been the unknowing recipient of a few of the
Program that those duties has annoyingly persisted. CFO’s unauthorized “perks,” the client alleged that
alleged the firm To understand how a CPA can be perceived as the CPA’s objectivity was impaired.
failed to detect responsible for detecting fraud in a client’s organi- Scenario 2: A CPA firm provided audit and
theft or fraud that zation, consider the following scenarios based on tax return preparation services for a textile company
arose from the real-life claims: for a number of years but eventually terminated
following services: Scenario 1: A CPA was engaged to provide services as the firm outgrew the client. Subsequent
tax planning and preparation services for a number to the end of the professional relationship, the client
59% of entities that were part of a family office. The discovered that one of its employees had misap-
family office employed a CFO charged with acting
propriated over $1 million, directing those funds
Tax services on behalf of the family members. The CPA met to another business owned by the employee. While
the majority of the funds had been misappropriated
with the family members at the beginning of the
23% relationship to discuss service needs and to get the after the CPA firm had ceased providing services,
engagement letter signed.
the client asserted that had the CPA firm pointed
Bookkeeping Over the course of the client relationship, the out certain red flags that were allegedly evident
and consulting CPA interacted almost exclusively with the CFO. during the performance of the CPA firm’s services,
services When the family office’s bookkeeper resigned, the the fraud would have been detected earlier, thus
CPA assisted the CFO with various responsibilities, lessening the damage. The client brought a $2 mil-
18% including bank reconciliations. It was subsequently lion suit against the firm: $1 million for misappro-
priated funds and an additional $1 million in lost
discovered that the CFO had been systematically
Attest services defrauding the family office for decades and had value of the client’s business, allegedly due to the
misappropriated nearly $10 million through exces- misappropriated funds. The total claimed damages
Source: CNA Accountants sive compensation, using a company credit card and were well above the CPA firm’s policy limit.
Professional Liability wire transfers to secret accounts he controlled to pay In defense of the claim, the CPA firm pointed
Claim Database, for luxury vacations for his family, tuition for his to its engagement letter provisions describing its
underwritten by
Continental Casualty children, and lavish artwork. responsibilities, and limitations thereof, related
Company. Copyright Defending the claim was difficult. While to theft and fraud detection. The firm also noted
© 2022. All rights there was an engagement letter in place, the CPA that the embezzled amount in any given year was
reserved.
indicated that it was intentionally broad in scope, below the materiality threshold for the respective
as the “client needed flexibility and did not wish to period. However, the expert hired by the defense
be bothered by the details.” The engagement letter noted there was room for improvement in the firm’s
also did not address any limitations of the firm’s workpapers related to accounts payable transactions.
services, such as the failure to detect theft and fraud, In addition, it appeared that the firm did not point
and since the engagement letter was perpetual, the out the client’s lack of access and oversight controls
statute of limitation was not available as a defense. in a written communication to the client.
The CPA’s involvement with bookkeeping for the CPAs may believe that longtime clients would
family office entities also proved detrimental. The never assert such a claim against them. However, a

4 | Journal of Accountancy October 2022