is the legal liability placed upon a working accountant while performing professional duties.
Accountant's Liability Details
Accountant's liability makes an accountant legally liable in misstatements or losses caused by incorrect representation of a company's books and even fraud. If an accountant took part in a fraud scheme and purposefully wrote inaccurate statements, well, that is most certainly illegal. Punishment will follow any accountant who has taken part in such scenarios.
So why is it necessary then to have an element like an accountant's liability? An accountant is still legally liable even if they're unaware of the crime themselves. If management is plotting to commit fraud, and the company's accountant fails to notice, they are still guilty. It is part of an accountant's job to detect and report such wrongdoings.
Since it's difficult to prove if an accountant was genuinely involved in fraud, negligibility of wrongdoings is also punishable. An accountant who is negligible of fraud can be blamed for not doing their job accordingly with the demanded care. An accountant who made an honest mistake will usually not be held liable under the "Generally Accepted Accounting Principles." Although their reputation might suffer, at least they won't be legally charged and punished.
Accountants carry the same professional responsibility as doctors, architects, lawyers, and any other profession that demands perfect execution to avoid possible damages. This pressure leads to most accountants purchasing liability insurance, also known as 'third-party insurance." In the case of being found legally liable, the insurance covers the payouts and legal costs. Of course, if the damages are intentional, the insurance doesn't cover anything.
Example of Accountant's Liability
Imagine an auditor that fails to spot a misstatement in a client's financial statement or company's books. Let's say that that client is a technology company. All consequences caused by that miss are placed upon the auditor.
When the statements are released with a clean audit opinion and are wrong, the accountant is liable for all losses suffered by the users that decided to trust the opinion and act on them. A lender might send some of their funds towards the tech company believing it's a safe lend, or investors might buy company stock based on the accountant's clean opinion.
Depending on how much impact a single statement had, which sometimes can be ridiculously large, the auditor might get overwhelmed with lawsuits and charges. Of course, an affected party has to rightfully prove that their decision was based mainly on the auditor's statements.
Significance of Accountant's Liability
The honest mistake of an accountant can lead to massive consequences. Significant investments and decisions are often based on the auditor's opinion and a company's public books. Significant investments can bring a company to a massive debt or even run it out of business. Adding such pressure on an accountant is to ensure the utmost effectiveness and care during their work.
Some accountants believe that they are not liable under federal security laws since they are not directly involved in securities. This is untrue; the statutes and the pertinent case law claim differently, which blindsides accountants unaware of their jobs' risks. An accountant's job is stressful enough dealing with numbers, tax laws, banks, etc. Like other professions like medicine and aircraft pilots, for example, a professional is not given the luxury of mistakes for a good reason.