SHORT PAPER – DUE PROFESSIONAL CARE AND DUE DILIGENCE
The legal risks faced by the CPA profession are ever so present today in our capitalist society. When CPAs and CPA firms execute an engagement for an auditing client, they know well that risk they exposed themselves to significant liability should their report conclusion and recommendations cause monetary damages. This liability does not only extend to direct customers. There is also a risk posed by third parties that at the time of the engagement the CPA or firm had no knowledge of. Common laws have various forms of negligence that the CPA profession has to defend itself against. The statutory laws add the additional liability of criminal proceedings against the CPAs and the CPA firms who find themselves as defendants. The ...view middle of the document...
The Ultramares v. Touche & Co. case of 1931 is a great example of the inherent risks of the CPA profession. Even though that Touche & Co. audit services would be used to obtain financing, they did not know who ultimately would be financing Fred Stern & Company. The New York State Appeals Court, for failing to see the deliberate misrepresentations on the company’s account receivable, upheld the gross negligent ruling that was given to Tuche & Co..
Another unique case was the ZZZZ Best Co. in the 1980’s. The thought that the Ponzi scheme would have been exposed earlier if a physical site inspection of the services performed were conducted even though enough information and documentation suggested that is was unwarranted.
In conclusion, the legal risks of the CPA profession are always on the mind of the CPA firm. These cases specifically bring to light the nature of due professional care and due diligence. Whether being uncertain as to how clients use an auditors report or realizing parties go to great lengths to cover up fraud, nothing is always as it seems. That is why independence is crucial and must have an unbiased approach. PCAOB will to continue to monitor public CPA firms and AICPA continues to improve best practices, this “grey” area which continues to put CPAs and firms in positions of liability and constantly defending themselves.
Whittington, R & Pany, K (2012). Principles of Auditing & Other Assurance Services. New York, NY: McGraw-Hill.
Chatfield, M (2013, January, 2). Ultramares Corporation v. Touche. retrieved September, 21 2013, from Wikipedia Web Site: http://en.wikipedia.org/wiki/Ultramares_Corporation_v._Touche
Knapp, M ZZZZ Best Company, Inc.. (n.d) retrieved September 21, 2013, from Rohan Chambers Web Site: http://www.rohanchambers.com/Courses/Auditing/ZZZZ%20Best%20Company.htm