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PROFESSIONAL LIABILITY SPOTLIGHT

Working with

third-party experts

By Deborah K. Rood, CPA

PAs understand when a client’s technical needs ■ A CPA firm refers a client that recently pur-
Complexity Cexceed their experience and a third-party expert chased a new manufacturing facility to a cost-
requires may need to be engaged to assist. However, working segregation firm and incorporates the resulting
expertise with these third parties does not eliminate risk for study into the client’s corporate tax return.
Over the CPA firm. Consider this claim scenario: ■ A client asks a CPA firm to amend payroll tax
returns to reflect employee retention credits
11,000 A client manufactured precision conveyor calculated by a third party independently
engaged by the client.
systems for the pharmaceutical industry. Each
system was custom-designed for the product, ■ A CPA firm performing an audit of a defined
The number location, environment, and other factors, benefit plan engages an actuarial specialist to
of sales tax requiring extensive computer programming. assist with the audit of the plan’s employee
jurisdictions in the The CPA firm advised the client that benefit obligations and disclosures.
United States. substantial research and development (R&D) Regardless of the situation, when third parties
credits may be available and referred the client are involved, a CPA firm should take additional
Source: The Tax
Foundation. to an expert. The client engaged the expert to steps to help mitigate risk, many of which are
conduct an R&D study, which the CPA firm required by the professional standards.
then used to amend tax returns, resulting in
substantial refunds. The amended tax returns Step 1: Assess the third party’s competence and
triggered an IRS audit, and a large portion of qualifications
the R&D credits was disallowed due to lack The “Use of a Third-Party Service Provider”
of documentation. interpretation (ET §1.300.040) of the AICPA
The client initiated a claim against the CPA Code of Professional Conduct requires a CPA firm
firm for the lost credits, indicating that because to “ensure that the third-party service provider has
the CPA prepared the amended returns that the required professional qualifications, technical
included the expert’s calculations, the client skills, and other resources.” In addition, paragraph
believed that the CPA firm had “signed off ” on .09 of AU-C Section 620, Using the Work of an
the calculations and supporting documentation. Auditor’s Specialist, indicates that an auditor should
“evaluate whether the auditor’s specialist has the
Just because an expert is involved doesn’t mean necessary competence, capabilities, and objectiv-
a CPA firm is entirely off the hook. When a third ity.” In other words, the firm should conduct due
party’s work is incorporated into a CPA’s deliver- diligence to determine whether the third party has
able or a CPA relies on the work of others in arriv- the appropriate expertise in the area that will be
ing at its conclusions, the CPA may be held liable leveraged or relied upon by the firm.
for deficiencies in the expert’s work. Even if the client selected and engaged the
third party, the CPA firm should independently
WHEN AND HOW THIRD-PARTY EXPERTS vet the expert if its work will be used by the firm.
ARE USED
Third parties may be engaged for their experience Step 2: Clarify understanding with the third party
in complex areas of tax that require specialized If the CPA firm is engaging an expert directly, the
knowledge or may be used to provide valuation, parties should enter into a written agreement de-
actuarial, or other expertise needed to test complex lineating the expert’s scope of services, each party’s
audit areas. For example: responsibilities, timing, and other important terms
■ A CPA firm engages a larger firm to review its and conditions. An agreement is required when an
tax filings related to the international opera- auditor’s specialist is engaged in accordance with
tions of its largest client. AU-C Section 620.

4 | Journal of Accountancy November 2022