Posted by Mary Milorrie Campos
Jun 17, 2021
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Understanding your legal liabilities as an accountant helps you keep your reputation intact and prevents you from facing unwanted charges. Here’s what you should know about it.
What are your legal liabilities as an accountant?
Accountants have a significant role not only in managing an organization’s finances but also in keeping an eye on any unethical practices.
As guided by the Generally Accepted Accounting Principles (GAAP), it is your duty to ensure that your client is adhering to all applicable laws and regulations concerning the accounting practice. This requires you to do your work with due professional care and vigilance.
Depending on your jurisdiction, you may be responsible for damages under the common law, statutory law, or both. If your failure to meet this obligation caused damage to your clients, third parties, or the government, you may have to face criminal or civil cases.
Liabilities under the common law
Liabilities to clients and third parties fall under the common law which includes:
Negligence
Negligence is the unintentional mistake made when auditing and preparing financial statements. It normally becomes an issue when the negligence caused damage to another party. Some of the mistakes you must watch out for include calculation errors, missing forms, inaccurate tax returns, and tax overpayments.
Read Next: 7 Common Accounting Errors and How to Correct Them
Gross negligence
It is the deliberate act of disregarding professional duties and accounting standards. Gross negligence has greater consequences as compared to negligence.
Breach of contract
Breach of contract happens when you fail to fulfill your express and implied duties as agreed upon in your engagement letter, and at the same time, the client incurred losses due to this shortcoming.
Accounting fraud
Accounting fraud refers to the illegal and conscious act of falsifying financial statements to deceive investors and shareholders. Some examples of activities subject to fraud are misstatement of assets and liabilities, overstatement of revenues, and failure to record expenses.
Liabilities under the statutory law
Statutory law is about the written laws passed by law-making bodies.
In the United States, the laws you must be concerned about as a CPA are the following:
Securities Act of 1993
A law requiring companies offering securities for sale to investors to register with the Securities and Exchange Commission (SEC). As an accountant, it is your duty to audit financial statements with due diligence.
According to Section 24 of this act, those who will violate any of its provisions may be fined up to $10,000 or imprisoned for up to five years, or both.
Securities Exchange Act of 1934
This law requires SEC-registered companies to file annual audits and conduct quarterly reviews of financial statements. The usual claims associated with this act are gross negligence and fraud. To avoid these, you must always make sure that you’re carrying out your tasks in “good faith.”
Those who will violate any provisions of this act may be fined up to $25,000,000 or 20 years of imprisonment, or both.
Private Securities Litigation Reform Act of 1995
This act requires audits to have procedures for detecting illegal financial acts and identifying related party transactions for financial statements. In addition to this, audits must also include an assessment of the possibility of substantial doubt regarding the issuer’s ability to continue as a going concern during the ensuing fiscal year.
Your responsibility as an accountant is to report any illegal activities to the management and board of directors. If you fail to comply with these requirements, SEC may impose a financial penalty of up to $500,000 to your firm and require your firm to return any of the profits made from the audit.
Sticking to the accounting standards and keeping your “good faith” in performing your duties prevents you from incurring criminal and civil liabilities. Before signing your engagement letter, make sure you spend enough time assessing your legal responsibilities.
Are you in need of additional people in your accounting firm? D&V Philippines guarantees that its accountants are well-versed in the accounting standards and practices in our clients’ jurisdictions. Contact us today for more information or get a copy of our whitepaper, D&V Philippines: Your Talent Sourcing Partner.
