Most sole practitioners and local CPA firms routinely provide write-up, payroll and other accounting services to their clients. Since there are no related technical standards or issued opinions related to these types of engagements, many CPAs view them as risk-free. Be forewarned — they are not! These services can generate a surprising number of significant malpractice claims; one case resulted in a judgment of $1 million! This course identifies the risks and proven risk mitigating practices throughout the entire life-cycle of an accounting services engagement, from client acceptance, to engagement performance, to withdrawal.
Highlights include how to have critical conversations with your clients regarding engagement scope, firm responsibilities and client responsibilities; supervision of client employees; prevention of engagement creep; maintenance of quality control throughout the engagement; withdrawing from an engagement; and numerous illustrative examples, flowcharts, observations, and engagement suggestions.
OBJECTIVES
PREREQUISITE: Experience in write up, payroll and other accounting services
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Chapter 0 - Overview
Course Objectives
• Be aware of the risks associated with bookkeeping services.
• Understand the methods of mitigating risks.
• Recognize engagement administration issues in providing bookkeeping services.
• Understand the benefits of engagement letters.
• Learn about engagement performance issues.
• Be aware of risks associated with internal control deficiencies and fraud.
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.
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.
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.
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