Litigation Risk Management

Article excerpt

Has the CPA Become the CYA?

There is a growing awareness in our society of the responsibilities of certified public accountants and the role CPAs play in maintaining the integrity of our economic system. As our visibility has increased, however, so has our potential liability, especially to the users of our services. In many cases, our knee-jerk reaction has been to cover our assets by focusing on the minutiae in the rules. As a result, we're unable to see the forest for the trees.

In response to my March editorial, "Certified Public Accounting: It Isn't Just About Numbers," reader Dave Tatlock, CPA, CPCU, wrote:

I've been in the profession for 20 years, the first 13 as an auditor. The thing I have found troubling about how our profession has evolved since my days as a staff accountant is how litigation risk management has transformed the audit process. The profession has largely taken a defensive approach to managing this risk: increasing required disclosures (often without regard to the usefulness of the information being presented), while reducing as much as possible the public's expectations of the value of the audit process. The CPA has become the CYA.

So here come the auditors, disclaiming responsibility for being able to detect fraud, discover materially misstated balances, or unravel complex transactions. In several recent cases, they have been able to offer real proof of their inabilities in these areas. With the notable exception of SAS 99, the profession's message to the investing public has been that auditors are basically powerless in the face of management that would manipulate results. Where does this end?

The way to change perceptions is to change reality-public accounting firms need to go on the offensive, and take more responsibility that the financial statements they audit can be relied upon. They need to produce a real value-added service to the companies they audit and to the general public, and to charge accordingly for this service. A strong profession, backed by the confidence of the investing public, can then take an offensive position against litigation risk, rather than trying to avoid financial responsibility by seeking to diminish its own importance in the eyes of the public.

The "top 10" list of auditors' worst nightmares includes learning that their audit risk has become a reality. Audit risk is defined as the risk that an auditor will conclude that the financial statements are fairly stated and an unqualified opinion may be issued, when they are in fact materially misstated. So what can be done to address the checklist "CYA" mentality that has evolved from the fear of litigation due to this risk? …