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This course provides a comprehensive review of the current standards and issues in compilation, review and accounting service engagements. The scenarios included provide examples from the whole spectrum of practice management and engagement performance. All CPAs managing compilation, review, or accounting service engagements will benefit.
Highlights include how to communicate engagement scope with clients; coverage of SSARS and TPAs; peer review deficiencies; firm vs. client responsibilities; supervision of client employees; prevention of engagement creep; engagement withdraw; and numerous illustrative examples, flowcharts, observations and engagement suggestions.
Objectives:Prerequisite: Experience in accounting services, compilations and reviews
Value Aid! AICPA Peer Review Checklists
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Introduction
Most sole practitioners and local CPA firms routinely provide bookkeeping (write-up), payroll, and other accounting services to their clients. Since these engagements involve no technical standards and issued opinions, most CPAs view them as risk-free. They are not. These services can generate a surprising number of significant malpractice claims: one case resulted in a judgment of one million dollars!
This course identifies the risks (and proven risk mitigating practices) throughout the entire lifecycle of an accounting services engagement, from client acceptance to engagement performance and even withdrawal.
This course provides guidance for the administration, performance, and reporting of compilation and review engagements. In addition, this course discusses and illustrates the professional standards that should be observed in the performance of a compilation or a review.
Organization
The course is a combination of discussion, examples to illustrate the concepts, plus thoughtful questions and answers and cases to test the understanding of the concepts covered in the course.
The course is organized as follows:
• Chapter 1: Bookkeeping, Payroll, and Other Accounting Services - Introduction - Introduces the risks associated with various types of bookkeeping and accounting services.
• Chapter 2: Engagement Planning and Administration - Discusses several administrative issues related to bookkeeping services, including client acceptance and independence issues.
• Chapter 3: Engagement Letters - This chapter covers key issues in using engagement letters for bookkeeping services, including timing and common engagement letter provisions.
• Chapter 4: Engagement Performance - Discusses issues that often arise in bookkeeping engagements, including staff supervision, change in scope of service, and how to follow professional standards.
• Chapter 5: Fraud and Internal Control - This chapter covers the risks of fraud and internal control deficiencies in bookkeeping services.
• Chapter 6: Compilations and Reviews - Introduction and Background - This chapter explores the authoritative guidance for compilations and reviews, the related interpretations, and the AICPA's Technical Practice Aids.
• Chapter 7: Engagement Planning and Administration - This chapter covers the steps necessary in planning a compilation or review engagement, including client acceptance and engagement letters. In addition, other administrative issues are discussed, including change in type of engagement and common peer review deficiencies.
• Chapter 8: Independence Considerations - This chapter explores the guidance found in the AICPA Code of Professional Conduct related to independence and the impact this guidance has on compilation and review engagements.
• Chapter 9: Performing Compilation Engagements - This chapter covers the performance and reporting standards applicable to a compilation engagement.
• Chapter 10: Performing Review Engagements - This chapter covers the performance and reporting standards applicable to a review engagement.
• Chapter 11: Quality Control - This chapter discusses the guidance found in the Statements on Quality Control Standards and their applicability to compilation and review engagements.
Conclusion
This manual is designed to be a permanent reference tool. We hope your reading of this manual enriches your professional learning experience.
Note. We use the terms he and she alternately throughout the course (except when a particular person is mentioned) since both sexes are well represented in the accounting and auditing areas.
Chapter 1 - Bookkeeping, Payroll, and Other Accounting Services - Introduction
Learning Objectives
• Understand the general nature of bookkeeping services.
• Be aware of common risks associated with bookkeeping services.
• Recognize basic risk mitigation techniques.
Foreword
Consider the following true story:
ABC Company (ABC), a commercial real estate development company in Florida, engaged the accounting firm of Able, Smith, and Johnson (ASJ) to provide bookkeeping services for ABC. The terms of the services were discussed with the owner of ABC, Mr. John Jones, and a notation was made in ASJ's file that Mr. Jones understood the terms, although he never signed an engagement letter.
Mr. Jones had absolute trust in his office manager, Bill White, and gave the him complete control over all aspects of the financial records, including accounts receivable, accounts payable, making bank deposits, processing payroll, signing checks, and reconciling bank records. Unknown to Mr. Jones and ASJ, Mr. White had been engaged in a complex embezzlement scheme in which he posted payments for payroll taxes but never actually made the payments. He instead diverted the funds to another account from which he wrote checks to pay for personal expenses. At one point, bank account reconciliation items totaling about $82,000 came to the attention of an ASJ staff accountant, who questioned the office manager about the items and received assurances from Mr. White that the items were due to legitimate delays in deposits being posted.
After ASJ had provided bookkeeping services for ABC for three years, Mr. White suddenly disappeared. Alan Wilson, a CPA and business consultant to Mr. Jones, was hired by ABC to step in as office manager. Wilson then discovered the failure of ABC to pay its payroll taxes as well as the embezzlement by Mr. White. The amount embezzled totaled about $100,000, but the failure to pay payroll taxes resulted in penalties and interest totaling about $175,000, a liability that caused ABC to lose its credit and declare bankruptcy.
Mr. Jones then sued ASJ for negligence in the performance of the bookkeeping services. A summary of the alleged damages in the suit included the value of Mr. Jones' business, about $1 million, plus approximately $350,000 of Mr. Jones' personal funds invested in an attempt to save his company. Added to the $100,000 embezzled and $175,000 in penalties and interest, total alleged damages came to $1.625 million.
The ASJ partner who serviced the ABC account testified at trial that the firm was only engaged to perform bookkeeping services for ABC, and that ABC never requested advice on payroll issues. However, Mr. Jones testified that he relied upon ASJ to advise him on all accounting and payroll matters.
At the conclusion of trial, the jury awarded over $1,000,000 to Mr. Jones, including interest and attorney fees. In polling the jury after the trial, the defense attorney for ASJ learned that the jurors found Mr. Jones' version of what happened more credible than that of the firm. Several jurors commented that in the absence of written evidence, they could not find that the client knew and understood that services would be limited to bookkeeping. They felt it was reasonable to assume that the client was relying on the firm for all accounting and payroll advice.
Analysis
Bookkeeping engagements have often been viewed by CPAs as presenting minimal professional liability risk because the CPA firm provides no assurance and the work is relatively straightforward and lacks technical complexities. However, if a client's company suffers a financial loss due to fraud or theft, the CPA firm is often viewed by the client as contributing to the loss. Based on recent claims statistics gathered by the AICPA Professional Liability Insurance Program, roughly two-thirds of professional liability claims originate from clients; many of these from bookkeeping engagements.
Introduction
This course illustrates the risks associated with bookkeeping and related engagements and suggests ways that an accountant can mitigate those risks. AICPA professional standards do not provide guidance on what bookkeeping services encompass or how bookkeeping services should be performed. In general, bookkeeping services include maintaining the general ledger and preparing a trial balance. However, firms often perform other services (e.g., payroll preparation or compilation of financial statements) along with bookkeeping services.
Risks
Without a clear understanding with the client about the specific scope of bookkeeping services to be performed, clients may assume that other services will also be included. For instance, bookkeeping service clients have filed malpractice claims against CPA firms after incurring penalties and interest due to failure to file or timely file payroll tax returns. In addition, courts have found accounting firms to be the "responsible person" for client payroll tax liabilities under Internal Revenue Code (IRC) ~§~6672 when the firms had authority to pay client bills without prior client approval, had signature authority on client bank accounts, or provided daily financial advice to the client.
Other common causes of claims arising from bookkeeping engagement scope disputes can be described as "expectation gap" problems (e.g., when a client and a CPA have significantly different expectations and understandings about the scope of services to be performed) or "engagement creep" problems (e.g., when a CPA performs services beyond the scope of the agreed-upon engagement). For CPAs who prepare bank reconciliations as part of a bookkeeping engagement, allegations of failure to detect fraud generally stem from the fact that the CPA did not examine cancelled checks because this was not an agreed-upon part of the engagement. However, the client expected the procedure would be performed as part of a bank account reconciliation process that allegedly would have discovered altered or forged signatures.
In the majority of bookkeeping engagement claims, either there is no engagement letter, the scope of services is not specified in sufficient detail in the engagement letter (e.g., "we will perform bookkeeping services ..."), or the firm has a pattern of performing services beyond those agreed to with the client and documented in the engagement letter. Judges and juries tend to favor the client in a scope dispute.
Other malpractice claims associated with bookkeeping service engagements arise when a client suffers a financial loss or is assessed tax penalties and interest. The following are common examples of situations that can lead to allegations against CPAs:
• General ledger errors - A CPA makes computation, input, or posting errors, or does not prepare reports on a timely basis.
• Misappropriation of client funds - Firm employees misappropriate client funds when they have unsupervised and uncontrolled access to client assets (e.g., check-signing authority).
• Failure to disclose a conflict - A CPA whose clients have adverse interests fails to disclose a conflict of interest as required by the AICPA professional standards, resulting in one party benefiting to the detriment of another.
• Failure to detect or report theft or fraud - A CPA fails to report internal control deficiencies, including the lack of separation of duties to the management of a small business client, resulting in an undetected theft or fraud by a trusted employee.
These examples illustrate some of the situations that can lead to malpractice claims against CPAs who perform bookkeeping service. Once you have learned to identify the risks associated with providing bookkeeping services, you can utilize risk management techniques to help reduce your exposure to claims.
Risk Management
There are important steps that accountants can take to prevent bookkeeping malpractice claims, including client acceptance procedures, clear client communications, engagement letters, and other steps. The scope of services to be performed, as well as the responsibilities of both the CPA firm and the client, can vary widely in a bookkeeping engagement. The keys to managing risk in this practice area include
• Discussing engagement scope, CPA firm responsibilities, and client responsibilities in detail with the client.
• Documenting the understanding with the client in a signed engagement letter prior to performing services and reissuing the letter at least annually.
• Supervising work performed by firm employees and holding clients accountable for supervising work performed by their own employees.
• Maintaining a system of quality control over services rendered.
• Continually managing client expectations to avoid expectation gap problems.
• Avoiding engagement creep by performing only those services agreed upon and documented in the engagement letter or an amendment to the letter.
• Informing clients in writing of internal control weaknesses that come to your attention.
• Withdrawing from engagements when clients fail to fulfill their agreed upon responsibilities.
Managing risks in providing bookkeeping services requires proactive planning and due diligence on the part of the CPA. This course is designed to assist you in managing those risks.
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