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Accountant Malpractice

Accountant malpractice is a growing issue. Our attorneys have significant experience representing clients who were victimized by an accountant’s violation of accounting and securities regulations by breaching contracts, giving unqualified advice, or conducting improper audits. Accountants must abide by the rules set forth by the Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), and Public Company Accounting Oversight Board (PCAOB). Accountant malpractice from the failure to conduct professional services in accordance with the rules and regulations promulgated by the applicable governing bodies can have significant financial ramifications for the decision-makers who rely upon the financial information they prepared. Accountant malpractice may also be found to be in violation of federal and state securities laws when false statements have an impact on the securities market. The 2002 Sarbanes-Oxley Act created the Public Company Accounting Oversight Board, which is charged with overseeing and regulating accounting firms. While auditors are charged with detecting internal weaknesses and performing fraud risk assessments, failure to do so may constitute audit accounting malpractice.

Elements of Accounting Malpractice

Accounting malpractice often involves negligent conduct which does not remove responsibility for damages it may cause. The legal elements of an accountant malpractice suit are as follows:

  • Professional accountant has affirmative duty of care and responsibility to the client;
  • Professional accountant engages in negligent activity, which may represent a breach of contract for violation of accounting industry rules;
  • Claimant suffers financial loss; and
  • Claimant must prove professional accountant’s breach of duty was proximate cause of damages.

Elements of Accounting Malpractice

Accounting malpractice often involves negligent conduct which does not remove responsibility for damages it may cause. The legal elements of an accountant malpractice suit are as follows:

  • Professional accountant has affirmative duty of care and responsibility to the client;
  • Professional accountant engages in negligent activity, which may represent a breach of contract for violation of accounting industry rules;
  • Claimant suffers financial loss; and
  • Claimant must prove professional accountant’s breach of duty was proximate cause of damages.
Our attorneys have significant experience representing clients who were victimized by an accountant’s violation of accounting and securities regulations by breaching contracts, giving unqualified advice, or conducting improper audits.

Forms of Accountant Malpractice

There are two degrees of accounting malpractice: “simple negligence” and “gross negligence.” “Simple negligence” includes errors that an average accountant would not commit, and “gross negligence” includes serious errors that deviate significantly from accounting standards. Some examples of accounting malpractice are:

  • Improper tax returns;
  • Incorrect advice on accounting matters;
  • Poorly kept financial books;
  • Embezzlement;
  • Failure to adhere to reasonable standards of care;
  • Faulty audits and failure to detect fraud;
  • Wrongful certification of financial statements;
  • Violations of federal and state securities laws by auditors;
  • Deviations from GAAP, GAAS and PCAOB rules;
  • Faulty estate planning advice;
  • Accounts receivable errors; and
  • License fraud.

Accounting professionals are required to maintain a “professional skepticism” about risk factors that can contribute to fraud when conducting audits of financial information about which they must provide “reasonable assurances” concerning the integrity of audited financial statements prepared for individuals who use this information to make financial decisions. For the various types of fraud, the risk factors can be characterized and are generally present when material misstatements are made due to fraud. The following are examples of risk factors accounting professionals can reasonably be held responsible to uncover during the audit process:

Risk Factors Relating to Misstatements Arising From Fraudulent Financial Reporting

Incentives/Pressures

  • Profitability is threatened by economic, industry, or entity operating conditions.
  • Management pressure to meet the requirements or expectations of third parties.
  • Management or board member’s personal financial situation is threatened by entity’s financial performance.
  • Excessive pressure to meet financial targets, including sales or profitability incentive goals.

Opportunities

  • The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent financial reporting that can arise from the following:
    • There is ineffective monitoring of management
    • There is a complex or unstable organizational structure
    • Internal control components are deficient

Risk Factors Relating to Misstatements Arising From Misappropriation of Assets

Incentives/Pressures

  • Personal financial obligations of employee with access to cash or assets susceptible to theft to misappropriate those assets.
  • Adverse relationships between the entity and employees with access to cash or assets susceptible to theft to misappropriate those assets.

Opportunities

  • Certain characteristics or circumstances may increase the susceptibility of assets to misappropriation.
  • Inadequate internal control over assets may increase the susceptibility of misappropriation of those assets.

Although the risk factors cover a broad range of situations, they are only examples. Accordingly, the professional accountant must consider any additional or different risk factors they deem relevant. Not all of these examples apply in every audit situation, and some may be of greater or lesser significance in entities of different size or with different ownership characteristics or circumstances.

Accountant malpractice claims are on the rise. Claims in this complex area of law frequently arise due to professional negligence of a trusted accountant or that accountant’s breach of their fiduciary duty to a client. Our cases frequently involve claims against accountants who violated their duties in connection with the sale of securities and other investments. In certain other circumstances, accountants and auditors may be held liable to someone who is not even a client of the accountant/auditor; because while accountants and auditors typically perform services for their clients, accountants and auditors also know that their services will be relied upon by non-client third-parties whose interests can be devastatingly harmed by a malfeasant or negligent accountant/auditor.

Silver Law Group has Martindale Hubbell “AV” Preeminent Peer Review™ rated lawyers committed to the representation of all parties injured as the result of accountant malpractice. Our legal team includes former defense attorneys and government prosecutors now working to protect all parties who suffered damages as the result of reliance upon accountant representations made through the preparation of financial statements and reports. We represent injured parties from accountant malpractice on a contingency fee basis.

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