Academic journal article Journal of Accountancy

Maintain Excellence, Cut Risk: Firms That Operate at the Highest Standards Minimize Liability Problems. Here Are Some Pointers

Academic journal article Journal of Accountancy

Maintain Excellence, Cut Risk: Firms That Operate at the Highest Standards Minimize Liability Problems. Here Are Some Pointers

Article excerpt

Despite a year of bad headlines, we all know that most CPAs are "good guys"--that is, intelligent men and women of character who respect their role as the cornerstone of the U.S. capital formation process. Nevertheless, recent company failures caused by a few bad apples have vividly demonstrated some of the profession's weaknesses and brought a spotlight to bear on the quality of audit and attest services. The public has said it's fed up with accounting lapses, and the marketplace is urging CPAs to do a better job. The remedy--the Sarbanes-Oxley Act's internal control certification requirements--has expanded CPAs' responsibilities. Here's how your firm can undertake a cultural tune-up, improve partner and stag performance and reduce risk and the potential for related litigation costs.


There are two basic risks for firms: catastrophic service failure, such as that incurred from providing inaccurate audit-related services, and business failure caused by losing top quality clients. A firm that merely reviews completed audit engagements to check whether staff complied with procedures or makes sure partners and staff members have met continuing education quotas isn't doing enough to mitigate its risk.

What will cut risk is to have every member of the firm commit to excellence in every aspect of the business, from checking financial statement footnotes to ensuring the audit committee understands them. Partners can inspire and better manage their practices by hiring the best people, training them well, applying high development and performance standards, firing poor clients and vetting new ones carefully.

As a case in point, I became vice-chairman of business assurance (audit) for Coopers & Lybrand in 1993 after the firm had incurred multi-million-dollar litigation settlements related to clients that had paid modest five-figure audit fees. My first step to upgrade the firm's risk profile was to appoint a committee of experienced audit partners to analyze the general counsel findings related to our more notable audit failures. They reviewed the litigation records to extract a detailed picture of those flawed audits and better understand what had gone wrong. The study showed those failures had resulted from a combination of factors: poor leadership and supervision, judgment errors in dispute resolution and working with undesirable clients.

To begin to correct the culture that had led to those problems, we turned to the CPA profession's long-established value proposition: The best people with the best leadership skills attract the best clients, which, in turn, provide firms with the financial and intellectual strength to attract, train and retain the best staff. Our risk mitigation program focused on three components: leadership, staff and the client base. By concentrating on developing a climate of excellence, we improved partner and staff performance, the quality of our clients and substantially reduced risk and related litigation costs.


To analyze the quality of your organization's leadership, answer the following questions:

* Is integrity its fundamental operating value?

* Does it create trust?

* Does it give staff the courage to question policies, procedures and decisions?

* Does it encourage a comfortable exchange of ideas, suggestions and opinions?

* How do firm leaders react to bad news?

If they squelch discomfiting information, your firm soon will be in trouble. Leaders who can't accept bad news surround themselves with people who withhold it. When that happens, exposure to risk increases exponentially.

Partners have a right and a responsibility to speak up if the picture formed in response to the above questions is negative, but getting cultural reform under way isn't easy. When I had to do it, my goal was to get partners to understand how committing to integrity and excellence--and paying for it--could be cost-effective. …

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