CPA Responsibility to Detect Fraud

We’ve worked on many fraud investigations over the years, from very small companies to large, publicly held companies.  Each situation is unique, of course, and different factors contribute to fraud in individual situations.  One of the common factors that has been present in every situation in which we have been involved is that the company had a relationship with a CPA firm and the owners/managers of the company relied on the CPA firm to provide a level of service that they did not provide.   In a couple of cases, it has appeared to us that the CPA firm violated professional standards and did not provide an appropriate level of service.  However, in most cases, the CPA firm provided exactly the services that they were contracted to provide in accordance with applicable professional standards.   The problem is that many business owners/managers EXPECT their CPA’s to provide services that they are not providing.

This is a problem for both CPA’s and their clients. CPA’s need to make sure that their clients fully understand the scope of work and manage their expectations accordingly.    A CPA who prepares tax returns or who compiles information for financial statements simply takes information that is given to them and puts it in the proper format.   They are not responsible for testing or evaluating the individual transactions and should not be expected to detect employee fraud.  Even when a CPA performs an audit of a company’s financial statements, they may easily miss employee fraud or theft that is significant to the business owner but not “material” to the financial statements.   The goal of an audit is to make sure that financial statements are presented in accordance with Generally Accepted Accounting Principles within a range of “materiality” that makes them useful to a third party user.  Financial statement audits are performed in accordance with Generally Accepted Auditing Standards, which have been enhanced in recent years to strengthen an auditor’s obligation to consider the risk of fraud and design procedures to detect fraud that may exist.  However, the main purpose of a financial statement audit is not to prevent or detect fraud and audit procedures which are completely and properly designed in accordance with professional standards may easily miss employee fraud.

For more discussion, read the attached article written by Thomas Buckhoff and published by the Georgia Society of CPA’s in Current Accounts in Oct. 2008, discussing the difference between Financial Audits and Forensic Audits.

Thomas Buckhoff Oct08 CA

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IAG Forensics

IAG Forensics & Valuation is a CPA firm that specializes in forensic accounting, fraud investigation, business valuation and litigation support.

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