by Communications between an accountant and his client are, likewise, confidential; and, in some, but not all, states, are treated as privileged and may not be disclosed without the client’s permission. However, in many cases, they still may be disclosed under court order. THIS IS NOT THE SAME AS AN ATTORNEY/CLIENT PRIVILEGE. There is also a limited privilege for certain non criminal tax matters and work papers.
The Securities Act of 1933. Criminality under this act relates to the fiduciary duty of auditors acting in a professional capacity for publicly held companies. Before any business can register to sell stock, an audit of financial records and other legal disclosures must be performed by a CPA. In order to avoid criminal liability under the Securities Act, the auditor must report any fraud or other criminal activity to the company’s board or the SEC, in cases of severe financial crimes.
With regard to the sale of unregistered securities, it is not uncommon for an accountant to become involved in the business opportunity of a client and assume a role as a partner or salesperson of investment vehicles.
However, when this happens, it is an invitation for disaster, and the opportunity for bad endings expands exponentially. So, any relationship beyond the accountant/client one should be approached with great care.
As a small firm or sole practitioner, you may not have the resources in place that a large firm has or have a corporate lawyer to protect you. Common sense and experience are going to be your best defenses against criminal exposure. If a client seems shady or asks you to do something unethical, there’s no law saying you have to work for them. Keep in mind you can still be considered civilly negligent if irregularities escape your attention.
You can also avoid problems at the outset by drafting engagement letters for each client that clearly outline your duties, responsibilities and legal obligations. For added protection, most accountants carry liability insurance. Aside from a general liability policy any business owner should have, look into an Errors and Omissions policy or accounting crime insurance.
When reconciling accounts or preparing financial statements uncovers inaccuracies or suspicious activity, ask questions to determine if it’s just an oversight that’s easily rectified or an attempt to misrepresent income. Reluctance to provide requested information or avoidance of sensitive conversations may indicate the need to reevaluate your relationship with your client.
When you suspect your client is breaking the law and placing you in jeopardy, your first instinct may be to ask another accountant for advice. Be aware they also have a duty to report crimes, and they’re not bound by any sort of confidentiality. The same goes for family members or friends, who also might be drawn into legal trouble by having knowledge of a crime.
Your best defense is talking to a lawyer who handles criminal financial matters. They can advise you about how to proceed in order to minimize your legal exposure, and anything you tell them is completely confidential.
Looking the other way when a client is involved in shady activities will do more than just affect your professional reputation; it could cost you your professional certification or worse, your freedom.
As the accountant or auditor of record, you must be aware of financial crimes of your clients. Knowing what to look for and how to mitigate potential pitfalls will keep you in good stead with regulators and out of disastrous criminal proceedings.
“No potential legal hazard has so surprised and alarmed the public accounting profession as the spectre of criminal liability.” So wrote accounting scholars Paul Hooper and John Page in 1984. The exposure of accountants to the risk of criminal penalties is expanding.
In general, most criminal liability actions against accountants were brought under the federal securities laws, most notably under Sec. 24 of the 1933 Act and Sec. 32(a) of the 1934 Act. The Federal Mail Fraud Statute also is a principal source of criminal liability for auditors. Lately, the accounting profession is concerned with suits brought under the Racketeer Influenced and Corrupt Organizations Act (RICO).
Both Secs. 24 (33 Act) and 32 (34 Act) make willful violations of any provision, rule, or regulation of the respective acts a crime. However, unlike Sec. 24, Sec. 32 uses the word “knowingly” in conjunction with “willfully.” Whether the two words are to be construed as synonymous is the subject of debate. However, regardless of whether these two terms are interpreted independently or together, it appears well settled that in a prosecution under either section, a specific intent on the part of the defendant to violate the law need not be shown. In a prosecution under the “willfully knowing” standard of Sec. 32(a), an evil purpose on the part of the defendant must usually be established.
Case law under the criminal provisions of the federal securities laws reveals a tendency toward increasing criminal liability for accountants. In United States v. Benjamin,10 the United States Court of Appeals for the Second Circuit held that an accountant cannot “shut his eyes” in the presence of fraud. Benjamin involved a prosecution against a certified public accountant who, after preparing pro forma statements relating to his client’s financial status, falsely reported that certain assets existed, when no procedures for verification or examination had been used. Responding to the argument that the evidence adduced at trial was insufficient to establish the defendant’s criminal state of mind, Judge
Friendly held that: The government may meet its burden by proving that a defendant closed his eyes to facts he had a duty to see… or recklessly stated as facts things of which he was ignorant .. . Congress .. . could have intended that men holding themselves out as members of .. . ancient professions should be able to escape criminal liability on a plea of ignorance when they have shut their eyes to what was plainly to be seen, or have represented a knowledge they knew they did not possess.
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