Understanding accounting malpractice: Maintaining independence in audits

As we established in a previous post, certified public accountants, much like attorneys, physicians or other highly skilled professionals, are subject to rules of professional conduct promulgated by the various states in which they practice.

To recap, the state boards of accountancy in many states, including Florida, have adopted the American Institute of Certified Public Accountants' Code of Professional Conduct, which dictates that all CPAs must fully disclose any conflicts of interest.

Indeed, the AICPA Code provides that accountants must be independent in both appearance and in fact when providing auditing services, and must also be aware of situations in which a conflict of interest might exist that precludes them from acting.

Scenarios in which a CPA would see their independence impaired while providing auditing services include:

  • He or she already has discretionary authority or already makes investment-related decisions on behalf of the audit client
  • He or she already maintains custody of assets on behalf of the audit client
  • He or she already executes buy-sell transactions on behalf of the audit client

Scenarios in which a CPA would not see their independence impaired while providing auditing services include:

  • Conducting a comparative analysis of the audit client's investments to third party benchmarks
  • Assessing the performance of investment managers tasked with oversight of the audit client's portfolio
  • Making recommendations about fund allocations based on the audit client's risk tolerance and other issues
  • Transmitting the audit client's investment selections to third-party broker-dealers so long as he or she is the one who made the decision and authorized the move by the broker-dealer

It's imperative to understand that if a financial loss results from an accountant failing to maintain his or her independence in relation to an audit, or failing to suggest an audit when necessary, he or she may be held liable for malpractice.

If you believe that you have been victimized by some form of CPA malfeasance, consider speaking with an experienced legal professional able to navigate this complex area and fight for justice on your behalf.

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