Being an accountant in SA carries with it increasing legal risks. The spike in the number of CAs under investigation in the last two years shows just how serious professional bodies and the courts regard accounting malpractice.
In this article in Accountingweb, Thomas Carver explains that as a small business accountant, you’re obligated to minimise your clients’ liabilities. You also have a professional and legal duty to spot potential pitfalls and reduce risk.
However, while large corporate accounting firms have the technology and resources to flag and mitigate legally risky behavior, small accounting offices or solo practitioners may not have the time or resources to identify problem areas.
Fortunately, there are warning signs criminal activity is afoot. Knowing what to look for helps you avoid accessory liability and protects you from legal jeopardy.
So, what is accessory liability? Well, if you aid or encourage the commission of a crime or have knowledge of one and say nothing, you are considered an accessory. Some courts have held that simply asserting your right to remain silent is not criminal conduct, but partial disclosure of information while failing to disclose more inculpatory knowledge can lead to criminal liability.
You may be an accessory if you perform an audit and find irregularities in accounts or financial records but don’t investigate and correct them. If the IRS gets involved, you’re liable as the accountant who signed off on the falsified information. CPAs may also be considered criminally liable and/or negligent if they falsify financial records or accounts, whether it’s with or without their client’s knowledge.
In addition to accessory liability, CPAs must guard against statutory liability. These are laws written at the state or federal level that define the legal culpability of auditors and CPAs. There are two main statutes that are relevant to accounting-related financial crimes.
Most commonly known as the Racketeer Influenced and Corrupt Organizations (RICO) Act, this piece of legislation was enacted by Congress in 1970 to bring organized crime figures and their accountants to justice. You could be found guilty of money laundering, participating in the management or operation of a criminal enterprise and/or concealing organized crime activity.
Plus, there is the Securities Act of 1933. Criminality under this act relates to the fiduciary duty of auditors acting in a professional capacity for publicly held companies. Before any business can register to sell stock, an audit of financial records and other legal disclosures must be performed by a CPA. In order to avoid criminal liability under the Securities Act, the auditor must report any fraud or other criminal activity to the company’s board or the SEC, in cases of severe financial crimes.
With regard to the sale of unregistered securities, it is not uncommon for an accountant to become involved in the business opportunity of a client and assume a role as a partner or salesperson of investment vehicles.
However, when this happens, it is an invitation for disaster, and the opportunity for bad endings expands exponentially. So, any relationship beyond the accountant/client one should be approached with great care.
As a small firm or sole practitioner, you may not have the resources in place that a large firm has or have a corporate lawyer to protect you. Common sense and experience are going to be your best defenses against criminal exposure. If a client seems shady or asks you to do something unethical, there’s no law saying you have to work for them. Keep in mind you can still be considered civilly negligent if irregularities escape your attention.
You can also avoid problems at the outset by drafting engagement letters for each client that clearly outline your duties, responsibilities and legal obligations. For added protection, most accountants carry liability insurance. Aside from a general liability policy any business owner should have, look into an Errors and Omissions policy or accounting crime insurance.
When reconciling accounts or preparing financial statements uncovers inaccuracies or suspicious activity, ask questions to determine if it’s just an oversight that’s easily rectified or an attempt to misrepresent income. Reluctance to provide requested information or avoidance of sensitive conversations may indicate the need to reevaluate your relationship with your client.
When you suspect your client is breaking the law and placing you in jeopardy, your first instinct may be to ask another accountant for advice. Be aware they also have a duty to report crimes, and they’re not bound by any sort of confidentiality. The same goes for family members or friends, who also might be drawn into legal trouble by having knowledge of a crime.
Your best defense is talking to a lawyer who handles criminal financial matters. They can advise you about how to proceed in order to minimize your legal exposure, and anything you tell them is completely confidential.
Looking the other way when a client is involved in shady activities will do more than just affect your professional reputation; it could cost you your professional certification or worse, your freedom.
As the accountant or auditor of record, you must be aware of financial crimes of your clients. Knowing what to look for and how to mitigate potential pitfalls will keep you in good stead with regulators and out of disastrous criminal proceedings.