GAAS Changes Could Expose Audit Firms To More Legal Liability, Warns LeClairRyan Attorney

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New modifications to America’s generally accepted auditing standards, or GAAS, will soon have a significant impact on audit and attestation engagements undertaken by CPAs.

New modifications to America’s generally accepted auditing standards, or GAAS, will soon have a significant impact on audit and attestation engagements undertaken by Certified Public Accountants, writes LeClairRyan attorney Nancy M. Reimer in a CorporateComplianceInsights.com column posted on October 22.

Although the goal of the “clarified standards” is to make GAAS easier to read, understand and apply, she warns that they also establish a higher “standard of care.” And failure to meet these modified standards could increase a practitioner’s exposure to legal liability.

The modifications issued by the Auditing Standards Board “represent a key component of a seven-year undertaking known as ‘The Clarity Project’ and are effective for audits of financial statements for periods ending on or after December 15, 2012,” writes Reimer, a shareholder in the national law firm’s Boston office who defends professional malpractice claims against accountants, attorneys, financial advisors and other professionals, as well as breach of fiduciary duty claims and claims against corporate directors and officers.

“Consequently, publicly-held and privately-owned companies and the CPA firms that advise them should start planning now, especially as the revisions cover a wide range of topics, from the way an engagement letter is written to the documentation an auditor is required to maintain,” adds Reimer, who also counsels clients in prevention techniques for avoiding litigation.

In the column (“Accountants Should Prepare Now for New Auditing Standards”), she notes that some of the modifications require auditors to engage in stepped-up planning discussions with clients, while some affect interim testing and additional fieldwork, and others require changes to the presentation audit report itself.

“One of the key objectives is to make the audit report and its purpose more understandable to investors and management,” Reimer explains. “For example, the introduction paragraph will no longer reference management’s responsibility or the auditor’s responsibility. Instead, a new section will be required, bearing the heading ‘Management’s Responsibility for the Financial Statements.’ It will focus on management’s responsibility for the preparation and fair presentation of the financial statements and will lay out management’s responsibility for the design, implementation and maintenance of internal controls.”

Gaining an understanding of the new standards, explaining them to clients and implementing them will likely mean additional time and increased expenses for accounting firms.
“Smaller firms are likely to be proportionately affected to a greater degree since they typically have a narrower base of business over which to spread the additional costs,” she writes. “The Auditing Standards Board, however, did make some distinction between audits of large publicly-held companies and the privately-held ones, often done by smaller CPA firms, so the additional costs those firms have to bear may not be unreasonably burdensome.”

The new guidance will likely set up a higher “standard of care” in the industry, which may have a significant impact on lawsuits and other matters involving allegations of accounting malpractice. If it is determined that an auditor did not comply with the new guidance, then it may imply the audit firm did not meet the established standard of care in the engagement, she warns.

Consequently, she advises that firms which develop their own audit methodologies should start preparing for the changes. “Even firms utilizing commercially developed audit methodologies may wish to consult with their legal and other advisers to ensure they understand the underlying standards and requirements,” Reimer concludes.

To read the full article, visit: http://www.corporatecomplianceinsights.com/?s=reimer

About LeClairRyan

LeClairRyan provides business counsel and client representation in corporate law and litigation. With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has approximately 350 attorneys representing a wide variety of clients throughout the nation. For more information about LeClairRyan, visit http://www.leclairryan.com.

Press Contacts: At Parness & Associates Public Relations, Marty Gitlin (631) 765-8519, mgitlin(at)parnesspr(dot)com or Bill Parness, (732) 290-0121, bparness(at)parnesspr(dot)com

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