Technical Mistakes

20 years of litigation
experience in Michigan

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Technical Mistakes

Technical Mistakes

There are countless technical mistakes an accountant can make, depending upon the kind of service that is being rendered. The tax code is notoriously complicated. An accountant may falter by missing opportunities to save taxes, by choosing options in the tax code that seem beneficial but are likely to produce adverse tax consequences, or by subjecting the client to audits or serious penalties due to aggressive behavior.

Wholly apart from tax issues, accountants are often relied upon by businesses to oversee their financial operations and to advise them on ways to avoid inefficiencies and embezzlement. The responsibilities that accountants have to do anything more than to accurately report in the financial statements and tax records the actual financial affairs of the company depends entirely on their contract with the business. This contract is generally set out in what is known as an engagement letter. Although the accountant and the client may agree on any level of service they choose, an accountant provides three different levels of service to a business

  1. Compilation- A compilation only requires that the accountant take data provided by the client and generate financial statements and/or tax returns. An accountant providing compilation services is generally not expected to be reviewing internal procedures, checking original books of entry against the data to make sure that it matches, and is not required to take into receipts, invoices, and individual checks to make sure that what is being put into the books is genuine.
  2. Review- The accountant looks at the entries from which the information being given to him or her was initially generated and makes sure that things balance and are providing accurate information to the accountant.
  3. Audit- In a compilation and a review, the accountant is not required to audit the books and records by checking original invoices, canceled checks, actual inventory, actual payroll or other records which could demonstrate that the books do not accurately reflect what is happening in the business.

A recurring problem in business are employees who figure out how to dishonestly get money out of the business. There are many ways in which this is accomplished, and they may include:

  • A dishonest bookkeeper may generate dummy invoices from individuals or companies that have never actually rendered services or sold goods to the company. The invoices are then “paid” with checks that are taken by the bookkeeper and turned over to an accomplice from the company that never rendered goods or services.
  • A person in control of the accounts receivable may steal checks coming into the business, deposit them into an account that has been set up in the same or nearly identical name as the business, and destroy all records of the account receivable so it will never show up that it was paid with a check the company never deposited in its own account.

When these or any other schemes are ultimately uncovered, the question is almost always asked: “Shouldn’t my accountant have caught this? Why didn’t my accountant set up systems to prevent this sort of thing from happening?”

The answer often lies in the engagement letter. An accountant who performs regular audits is surely required to be advising the client on what are known as “internal controls.” For example, all accountants know that the person with authority to sign checks should never be the one reconciling the bank statements, because it is too easy to bury a phony transaction when the bank statement comes in.

In one case handled by this law firm, the bookkeeper was getting the bank statement and only showing it to the owner after the balance amounts have been altered to show that all the money that was supposed to be there was in fact in place. Only when the account was empty and checks began to bounce did the owner retrieve original bank statements from the bank and find out that money had been disappearing for many months. If the owner had had a simple rule that only he could open bank statements (or had them delivered to his home rather than the business) the scheme would never have worked. But if the account is only hired to do a compilation and is not contracted to provide advice to the business on internal controls, a claim against the accountant will probably fail.

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