Audit-related malpractice claims tend to comprise only a small part of accounting malpractice claims (tax preparation claims accounts for the majority), but are severe and can be quite costly to the accounting firm. Claims can either be from public company audits or audits of nonpublic organizations. An estimated 40% of all audit claims allege that the auditor either failed to advise a client of “internal control weaknesses” that should have been corrected to reduce the risk or fraud, or the auditor failed to detect fraud altogether.
Three types of claimants bring on audit claims: a client business (often asserts claims that arise from mismanagement or fraud by employees or management); shareholders (typically pursing claims to recover returns and lost investments); and lenders (usually claiming reliance on an auditor’s report in issuing lines of credit and attempts to recover losses when a client business fails).
To better understand the types of claims in this type of malpractice, the following is a list of common accounting auditing malpractice claims:
- Accounts receivable errors: Verification of accounts receivable and inadequate testing are two common problems in audit claims.
- Failure to detect defalcations: Defalcation can include the misapplication, theft, or misuse of funds by an executive or official entrusted with the funds. A similar act by a lower level employee is called embezzlement.
- Inventory errors: More than half of all audit-related claims arise from improper inventory valuation.
- Inadequate financial statement disclosures: Another type of audit claim is when appropriate disclosures are not included on the face of financial statements or in the footnotes.
- Engagement letters: These letters describe the scope of service to a client when the service begins.
Auditors certainly have a difficult job, but a few more common problems tend to arise in audit claim investigations, such as inappropriate audit plans being used, showing the need for the professional to be extremely detail oriented and avoid common mishaps. Otherwise, the auditor and their firm may face an expensive malpractice lawsuit.
Kentucky accounting auditing malpractice attorney Tad Thomas is committed to helping organizations and businesses navigate the complex legal issues in a malpractice lawsuit and aims to hold negligent accounting professionals liable.