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Why small CPA firms should care about fraud

· 5 minute read

· 5 minute read

With the recent rash of public company fraud issues that were missed both internally and by external auditors, there has been a lot of negative news coverage for the accounting industry. But what does this mean for small CPA firms who don’t perform audits?

In this episode of Pulse of Practice “Should a Small Firm Care?”, Paul Miller, CPA from Business by Design, and I are joined by Brian Fox, Founder of Thomson Reuters Confirmation. Together, we dive into the perception of accounting firms considering some auditing struggles and the reasons why even small, non-audit firms need to be concerned with fraud.

How public company fraud affects the small CPA firm

We often talk about how important reputation is in a client-focused business such as accounting. With recent fraudulent activities from companies such as Wirecard, integrity concerns are rising among clients about accounting firms in general.

“In a word, I think we are getting trashed,” notes Brian. “Just google ‘CPA firm auditor’, and the headlines around auditors and the press is not very good for our profession right now globally.”

Paul’s company is a small firm of 15 staff members. They don’t typically deal with anything related to audit because the small business owner clients don’t seem to need it, and if they do, he can refer them to another, specialized firm. So, why should the audit world be relevant to this small CPA firm?

“It’s relevant because we’re CPAs,” says Brian. “The brand that CPA stands for, in my opinion, has historically been an honorable profession, and it’s one that upholds the public good. I constantly remind people that the ‘P’ in CPA stands for public. We are there to stand in and think about the work that we do on behalf of the public.”

This means when we have a body of work that is losing the public’s trust in our brand, that permeates every individual in our profession, not just the auditors. Tax professionals, anybody with CPA after their name, are getting thrown under the bus. It is going to tarnish the reputation that those before us have worked hard to build.

“There was a point in time when somebody must have said this is too hard and finding fraud is not our job,” adds Brian. “I’ve always argued that material misstatement, regardless of whether it is due to error or fraud, is our responsibility.”

Non-audit firms can still employ best practices through their advisory services

When you’re a firm centered on advisory, you sell a relationship, not a service. That rings true in these situations of fraud because part of your relationship with the client is to question how you can help. Whether that is a formal audit or not is irrelevant at a small firm level, because there are things you can do to help protect your client. How can you identify things in advance to help them move forward? Do you see poor internal controls? Do you see a lack of record-keeping that could give somebody an opportunity to commit fraud?

“Non-audit firms can employ some of these [best practices] during your advisory services because if you can catch an employee who has set up a fake vendor and has been paying themselves $25,000 a year, you’ve paid for your services,” notes Brian. “That client is going to not only thank you, but they’re going to recommend your firm to a whole host of friends and neighbors.

“I know if I’m a business owner and you caught somebody on my team doing something like that, I’m going to be with you for the long haul. It builds on that relationship.”

Clients are expecting their accountant to protect them from fraud

Put yourself in the client’s shoes and understand what is in their mindset. They’ve seen the same negative articles on fraud, and it is probably sitting in the back of their mind as they come to you. You must realize, even as a small firm, that there is a concern about bad behavior and quality. Clients want to protect themselves.

“As the accountant, you have to have that inquisitive mind,” says Paul. “That inquisitive nature should be there to question if something makes sense. Those skill sets are valuable to bring to the table, and that is what clients really expect from us whether they verbally say it or not.”

In a small business setting, they may not voice their concerns. However, it’s still important to be aware of what may be in your client’s mind, as you are serving this client and building a relationship.

“I’ve seen this with mergers and acquisitions,” adds Brian. “A lot of smaller businesses who don’t have audits will go through being acquired, and they’re going to ask your accounting firm to look over the numbers of the other company.”

You’ll have to do some level of due diligence. Asking those questions and having those audit tools in your pocket, whether it’s for validation, will be key.

“My brother and I used to ride around the backyard in my mom’s police uniform with her bobby stick, chasing the bad guys in our heads,” says Brian. “He went into law enforcement, and for me, this was my way to help. What I always say is, help the good guys catch the bad guys.”

Listen to the “Should a Small Firm Care?” episode of the Pulse of the Practice podcast on your preferred platform (Apple, Spotify, Stitcher) or here.

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