Accounting Malpractice – and the Law

Accounting malpractice may not get as much attention as medical malpractice, but it is a serious and under-appreciated problem.  Like medicine, or any other profession that maintains professional standards, accountants are expected to perform their tasks with a certain level of care and competency. When an accountant fails in that duty – violating a reasonable standard of care in the profession – they can be held liable for the results.

The Merriam-Webster dictionary defines a certified public accountant (CPA) as “an accountant who has met the requirements of a state law and has been granted a certificate.” Specific professional bodies also have their own definition of the term. That definition, combined with industry standards for proper accounting practices, helps define what constitutes proper or improper conduct.

For example, accountants are expected to follow the Generally Accepted Auditing Standards (GAAS) and General Accepted Accounting Principles (GAAP). In the U.S., GAAS regulations are developed and maintained by the Auditing Standards Board- of the American Institute of Certified Public Accountants (AICPA). GAAP, on the other hand, has been adopted by the U.S. Securities and Exchange Commission (SEC).  GAAS demands that an auditor must maintain an independent outlook, maintain his or her professional proficiency and training, and report misleading financial information. GAAP focuses on how an accountant derives and delivers crucial information such as business income and expenses as well as liabilities and assets.  GAAP also focuses on presenting information consistently.

In California, a 15-member state Board of Accountancy oversees numerous specific practice regulations. The regulations note that, “Protection of the public shall be the highest priority for the California Board of Accountancy in exercising its licensing, regulatory, and disciplinary functions.”

According to an article written by Willis W. Hagen II, determining malpractice, as in other negligence issues, can pivot on the “reasonable man” rule – which is not a fixed standard but responds to the given circumstances. This means that while a CPA might feel he or she acted correctly, the situation can be reviewed in its totality to see whether those actions were in fact reasonable.

As was demonstrated in Schrader v. Scott, in which G&T co-founder Stephen J. Tully defended an accounting firm, matters such as timeliness are also important to the outcome. Both accountants and their clients are, therefore, on notice that there can be genuine and critical issues relating to accounting malpractice.

Comments are closed.