The Importance of Accountants in Law Suits
Accounting is used in all types of legal cases, often in a very discreet manner and some time as the main focus of the case but in most instances it is used to substantiate a claim or to refute the argument of the other party. Some specialized accounting practices that are often used on a legal matter are: forensic accounting and valuation.
Forensic accountants are usually hired to investigate financial records and trace funds in cases that involve fraud or embezzlement. Forensic accountants can trace funds for the purpose of insurance claims and bankruptcy as well. In a business dispute, it is important to employ an attorney who has an understanding of the forensic accounting techniques that are used in fraud investigations. When an attorney is properly versed in such techniques, he or she can use this knowledge to assist an accountant to maximize support for supporting documentation and to know when and what questions to ask a client or accountant. A proper understanding of these techniques will also enable the attorney to work effectively with the accountant to minimize and avoid mistakes that could negatively affect the outcome of the case .
In addition to files and documents, forensic accountants will ask for documents that may not seem relevant or necessary. Because the nature of fraud is hidden, a lot of the documents produced during an investigation may be documents relating to sources unrelated to the fraud. These documents are necessary to identify suspects, communicate with insurers, examiners, accountants, attorneys and bankers, obtain information about owners and investors and other parties involved. An example would be when a firm is used, such as the law firm which represents a client, an accountant, an insurance firm or a real estate firm.
A crucial service that an accountant provides in litigation is valuation services. Accountants will develop a range of valuation opinions on potential damages that may be used in pleadings in the description of various claims. These opinions are generally known as a damages model. Since damages may be awarded for different periods, the accountant will often have to provide updated damages models at different stages to mirror the evolution of the case as it unfolds.
Essential Legal Responsibilities for Accountants
Accountants are bound by numerous legal obligations, applicable at the local, state and federal levels, collateral to their work. Federal laws and regulations can apply depending on the business structure, including the Sarbanes-Oxley Act for public companies, related rules of the Securities and Exchange Commission (SEC), including the SEC’s Rule 607(a) which governs who may act as a "principal" in registered accounting firms, and Auditing Standards Board pronouncements. The Uniform Accountancy Act, a model developed by the American Institute of CPAs and issued in 2004 by the National Association of State Boards of Accountancy, governs the practice of public accounting in most states. Generally, accountants must: Accountants are also required to report fraud when its discovery is necessary to comply with laws and regulations that are governing them, observed in the course of a professional service or when audit standards state that confirmation of it is necessary. Accountants are prohibited from disclosing client information unless expressly permitted, required by laws or regulations, or pursuant to a subpoena or inquiry from investigatory or disciplinary agencies. Accountants also have independent legal obligations under other laws and regulations, which may include: Accountants must comply with the evidence rules when they must testify in litigation as expert witnesses, including preparation of written reports that are governed by Civil Rules of Procedure 702-705 that set out requirements on competencies, bases for opinions and limitations on scientists and experts.
Legal Issues in Financial Statements
Legal considerations play a pivotal role in the realm of financial reporting. The father of modern accounting, Luca Pacioli, described his work in the late 15th century as "divine," a description that accurately described the legal perspectives that were to develop from them. From the counting house to the courtroom, accountants bring their bag of tools and expertise to bear into what later became known as the "accountability profession."
So what does this matter for today’s businesses? Well, a lot. In our legal system, the "reasonable person" standard is used to evaluate actions on a question of liability—if the "reasonable person" would have done something differently, the person on trial may be liable. In the case of financial reporting, if the reasonable person would have disclosed more information or recorded data differently, then it is highly irresponsible to not do so. Information is paramount to a sound financial statement, and an accountant or business professional is held to a high standard of reliability.
The ever-increasing importance of disclosure also comes from the fact that materiality, a core concept in financial reporting, is interpreted as being everything that may influence decisions. This means that an accountant’s duty of care is focused on providing the most complete and accurate data possible. Rules such as SOX (Securities & Exchange Act) have helped define and regulate corporate governance.
Ethical Issues in Accounting and Law
Accountants often face challenges that present ethical dilemmas for which there may be no single answer. These dilemmas can, in some cases, raise legal issues, but all can have reputational and professional ramifications. Here are some common ones:
Disclosing Confidential Information
The core of an accountant’s business is an obligation of confidentiality. However, there are exceptions, such as a valid subpoena. But what if we learned that a client might have contributed to a market manipulation scheme? An accountant’s obligation of confidentiality can collide with his or her responsibility to report suspicions of illegal activity.
Cooperation With an Investigation
Another potential source of tension between budget and ethics arises when the accountant learns that a company is the target of a federal investigation. For example, subpoenas requested by an investigating agency might be expensive for the company and for the accountant. If the accountant has a history of providing information to the investigating agency, further tensions may arise. The accountant and the company might be cited for failing to cooperate if the company chooses not to allow the accountant to continue assisting the investigating agency .
Making Firm Decisions
Internal policies regarding conflicts, enforcement, and related party transactions often involve professional judgment that must be made in a timely manner, without apparent or real conflicts of interest. Who decides what? If a conflict of interests issue or a decision pointing to a breakdown in internal reporting or enforcement is covered up or ignored, there may be severe damage to the company/investment firm. In the current environment, a company or investment firm may seek to cover up professional judgment issues with respect to conflicts of interest or actions that led to a breakdown of internal reporting in spite of responsibility assignments from the C-Suite or compliance officers to accountants.
Not Prosecuting Individual Wrongdoers
In many cases, improper activities might be identified by accountants, but there appears to be reluctance to prosecute or cite the related individuals in connection with the underlying issues. This concerns some accountants, who believe that they could do a better job in the prosecution of such individual responsibilities.
Tax Laws and Their Impact on Businesses
Accounting professionals help businesses with some of the most complex aspects of their day-to-day operations, namely the myriad federal and state tax regulations and the many forms of corporate compliance. The expertise and training accountants have with regard to taxation help streamline the process of remaining compliant with federal laws and regulations which is crucial for all businesses.
If a company does not remain compliant with IRS and state tax requirements it could have serious consequences. Non-compliance with federal tax laws can result in:
Non-compliance with state tax laws can result in: By maintaining accurate records, accountants allow companies to make educated decisions that ultimately save them money in the long-run. Accountants help their clients by using their skills and training to keep expenses low and help them avoid costly penalties that often accompany accounting mistakes. However , the legal risks can extend beyond just accounting mistakes. On occasion, taxpayers have been accused of committing fraud even when they were completely unaware that their actions qualified as a criminal tax violation. While these cases are certainly rare, the possibility that innocent taxpayers might face tax fraud charges nonetheless exists and it is important to be vigilant about remaining compliant.
Tax advisors work with tax payers to ensure they understand their federal and state rights and obligations. They can help taxpayers navigate tax code complexities and ensure they comply with federal and state tax requirements. They also handle complicated documentation that comes along with making important decisions about tax structures, investment choices, asset protection and estate planning. Tax advisors can help mitigate the risk of non-compliance, which all result in increased efficiencies and cost savings for their clients.