Risk Management for Accounting Firms – Essay – dawnsm1th
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Risk Management for Accounting Firms
Assignment: JournalRisk Management for Accounting FirmsAC502-01 RegulationProfessor Elaine LernerJuly 14, 2018Prepared by Dawn SmithSUMMARY Accounting firms have a higher exposure to professional liability issues than do other more traditional or standard businesses. In fact, most professional industries that require college degrees, additional training and certifications like medical practices or law firms are held to a higher standard. Challenges arise not only through malpractice, employee negligence, and confidentiality matters, but through the intentional acts of clients and, unfortunately, partners who seek money over integrity. While you can strengthen your ability to protect yourself from the very beginning in the way you organize your firm, no one entity type can protect you from all types of liability. A Professional Corporation (PC) can provide protection for you against any malpractice by other partners; however, it will not protect you from your own negligence (Mintz, R. 2016). So, if you are a small firm and you are the only principal of the firm, a PC probably isn’t the way to go, as it doesn’t offer any other benefit from a standard corporation regarding tax benefits or give you any other legal advantage. On the other hand, traditional corporations can protect you against any claim that is not negligence in that the individual principals of a corporation are shielded from loss of assets should you be sued for malpractice, or file bankruptcy and have outstanding debts (unless you signed a personal guarantee). But, every individual is responsible for their own negligence regardless of the entity form (Mintz, R. 2016). Along with choosing the proper corporate structure, there are other safeguards that you can put in place to help reduce any future liability. Among them are creating and maintaining strong, written employee policies and procedures, a code of ethics that you actually attend to, proper insurance coverage, continual requirement of education and training, and a formal vetting procedure for hiring your employees and/or partnering with other professionals in the same trade.
DISCUSSION As outlined in an article by John Freedman (nd.), accounting and auditing firms face several types of risk, some of the most prominent risks are:Inherent Risks are those risks that can be affected by both internal and external sources. The economy, new competitors, and lack of financing for building your business are all risks that are out of your control. But, the competency of your staff is an inherent risk within your control. By vetting your employees prior to hiring, demanding on-going education and training to keep their positions, and having the proper insurance coverage that cover the acts, or negligence, of your employees you can reduce the risk.Control Risks are those that can be limited by having a set of strong internal controls. Material misstatements that are found, but not in time for the end of the reporting period would be an example. Having an internal control, such as a proper due-by-date, or cut-off date, for review and finalization can help curb this possibility.In the case of Auditors, Detection Risk is a worry and the responsibility of the auditor. If the auditor has such lax tolerances during audits they can, and most likely will, overlook misstatements. By tightening down on the limits of materiality he or she would reduce the risk.And finally, Audit Risk; the chance that an auditor would issue a clean audit report on a bad set of financials. However, as previously discussed, this is a risk that the firm has control over with its internal protocol, such as authorization prior to submittals of produced works, hiring procedures, continuing education efforts, and insurance coverage. CONCLUSION In today’s world, with the progression of the internet, instantaneous communication that is susceptible to unauthorized disclosure, and frivolous lawsuits, any business owner would be wise to outline and prepare their risk management tactics prior to opening their doors for business. I believe one can never have enough insurance. Insurance is one of those necessary evils and most small business owners are cash poor just to be insurance rich. As an accountant I will always carry insurance policies that cover errors & omissions, professional liability, and business service bonds for my employees that work at a client’s site.
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By: dawnsm1th
Submitted: August 3, 2018
Essay Length: 980 Words / 4 Pages
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