What Is Accounting Malpractice?

Have you been a victim of accounting malpractice? If an accountant has betrayed your trust or acted negligently, you may be eligible for damages. Accounting malpractice affects many businesses every year. A knowledgeable and experienced accounting malpractice lawyer can help you receive the damages you deserve.

Defining Accounting Malpractice

An accountant is a business professional who among other things collects financial data, records, analyzes and summarizes the financial information for their client. They may be responsible for analyzing this data for individuals or organizations. Their duties may range from verifying the accuracy of financial documents to conducting forecasting or preparing tax returns.

As with many professional positions, like medical doctors and lawyers, accountants may be sued for malpractice. Accounting malpractice becomes a realistic charge when the accountant's performance falls below certain professional standards. An accountant who is found to have committed malpractice may be required to pay damages for the resulting financial harm caused by their wrongful behavior.

Clients regularly rely on accountants' specific expertise to give proper advice and accurately prepare financial documents. When accountants fail to deliver, clients whether individuals or corporations may bring accounting malpractice claims. However, not every case involving an unsatisfied client amounts to accounting malpractice. The accountant's behavior must display a certain level of negligence, incompetence, or other wrongful behavior.

Examples of Accounting Malpractice

Accounting malpractice isn't cut and dry. It may arise in a variety of ways and under numerous circumstances. One of the first problems your accounting malpractice attorney will need to consider is what kind of malpractice you are facing.

Examples of accounting malpractice include:

  • Giving incorrect tax advice
  • Providing incorrect reports to stockholders
  • Billing or accounts payable fraud
  • Enabling tax evasion, accounting fraud, or embezzlement
  • Faulty estate planning advice
  • Any other breaches of fiduciary duty

Incorrect Tax Advice

Incorrect tax advice can take many forms, from incorrect filing dates to writing off incorrect business expenses. For example, the case of Hamadeh v. Spaulding involved incorrect tax advice regarding New York's residency rules, which resulted in an accounting malpractice suit.

In the 2015 New York case, Hamadeh v. Spaulding, Hamedah sued his accountant, Spaulding, for accounting malpractice based upon incorrect tax advice Spaulding gave Hamedah. This incorrect tax advice spurred an audit by the New York State Department of Taxation and Finance (NYSDTF) for the tax years 2005 through 2007. 

The audit surrounded the issue of Hamedah's domiciled state and New York's 183-day residence rule. Spaulding had given incorrect tax advice based on Spaulding's incorrect advice regarding the 183-day rule.

The NYSDTF proposed an assessment of tax deficiencies, interest, and penalties for these years, amounting to $763,987. Hamadeh eventually settled the dispute for $478,049.75, and The Department canceled the assessment.

After hearing the case, the judge awarded judgment to Hamadeh for damages they suffered as a result of accounting malpractice by Spaulding. 

Providing Incorrect Reports to Stockholders

Stockholders and investors rely on financial reports to determine a company's value. Incorrect reports can make the company look more or less valuable than it actually is. This can lead to the investors not being properly compensated.

Financial reporting includes the company's financial statements, like:

  • Balance sheets
  • Income statements
  • Cash-flow statements

Financial reporting may also include other documents, such as shareholder reports and investor prospectus. It may even include any financial information posted on your website.

Publicly held companies also have additional reporting requirements, like forms filed with the Securities and Exchange Commission (SEC), press releases containing the company's financial information, and earnings calls.

Most financial reporting follows accounting standards like the Generally Accepted Accounting Principles (GAAP). Although, even accountants following these standards can still encounter a GAAP lawsuit. 

Billing Fraud

Billing fraud is also known as accounts payable fraud. When someone submits fake, inflated, or personal expenses to the employer for payment, it may result in fraud. It may be as simple as lying about a business meeting meal or as elaborate as creating a fictitious shell company and invoicing the employer regularly for false services performed by this fake company.

Billing fraud is more likely to happen when the proper checks and balances aren't in place. If the same person is in charge of signing payments and reviewing them, then billing fraud is less likely to be noticed immediately.

Billing fraud can be committed by internal employees, external vendors, the two parties working together, or an outside party who gains access to the accounts payable systems.

The most likely ways to find out about fraud within your organization include:

  1. Whistleblowers
  2. Internal audits
  3. Management reviews

Most employees committing billing fraud have worked for the company for several years, and 90% are first-time offenders. Frequently, the motivating factor for fraud-related conduct is personal financial stress. 

Enabling Tax Evasion, Accounting Fraud, or Embezzlement

Accounting malpractice can occur when the accountant enables tax evasion, accounting fraud, or embezzlement.

Tax evasion is the act of obscuring income or hiding the nature and source of the company's profits in an attempt to avoid paying the full amount of taxes due.

Accounting fraud is the wrongful alteration of a company's financial documents to either conceal or exaggerate a company's profits or losses. Accounting fraud is typically done to increase personal or corporate gain.

Embezzlement is the act of wrongfully keeping, taking, or using corporate assets entrusted to them for a different purpose.

Faulty Estate Planning Advice

If your accountant has given faulty estate planning advice, you may have an accounting malpractice claim on your hands, particularly if the advice resulted in some financial harm to you or your estate. 

If you're unsure whether your case qualifies, you should discuss the specifics with a malpractice lawyer before reporting an accountant for misconduct.

When Should You Seek Legal Representation?

If you feel you have been a victim of accounting malpractice, you should seek legal representation immediately. Your statute of limitations has already started, and you have limited time to contact an experienced attorney to file your case.

The accounting malpractice attorneys at King & Jones have decades of experience representing clients facing similar issues. We are ready to discuss your case and help you —  contact us today.

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