Accountants' Responsibilities to Clients, Government, and Third Parties

Introduction to Accountant Responsibility

Accountants have responsibilities to a number of parties, with the three major parties being the government, clients, and third parties. In today's capitalist society, the accounting profession is deemed a common and important feature of economic life. Discussing the responsibilities accountants owe to each of these three parties is, therefore, a prudent and logical undertaking.

Core Responsibilities to Each Party

Accountants have a responsibility to keep client information confidential. If an accountant discloses confidential client information to a third party without authorization, that accountant would be deemed to have violated Rule 301. The rule states, in simple terms, that "a member CPA shall not disclose any confidential information without the specific consent of the client" (Perkins, 2004). An accountant must therefore obtain the client's consent — which may be in writing — before disclosing information that could be regarded as confidential.

It should be noted, however, that an accountant cannot be deemed to have violated Rule 301 if the information disclosed is already in the public domain. Similarly, an accountant cannot be held liable for violating client confidentiality when disclosures are made pursuant to legal proceedings. Another critical responsibility accountants owe their clients involves the exercise of due professional care. This means that if an accountant neglects professional standards in the execution of duties — for example, by failing to detect fraud that ought to have been easily detected — the affected client may claim negligence.

Third parties include all outside parties with whom an accountant is familiar and who are seen as key beneficiaries of the work being undertaken, or who might rely on such work. Accountants owe a responsibility to third parties when rendering opinions, and could be liable for fraud or negligence — gross or otherwise. An accountant, in the words of Newton (2009), is "relied on to reveal all those facts that might be relevant and important to other persons."

For instance, in the preparation or review of financial statements, when an accountant reasonably expects that a third party will rely on the financial data presented, the accountant has a responsibility to exercise reasonable care and make all reasonable disclosures. The third party in this context could be shareholders, who are seen as "standing in the shoes of the party contracting for them" (Bruner and Haley, 2007, p. 237).

The responsibility of accountants also extends to the government. An accountant could incur criminal liability for the willful violation of various Acts and regulations. For instance, criminal liability could be incurred for the willful preparation of falsified tax returns. As Perkins (2004) points out, a CPA or accounting/auditing firm is also expected to comply "with applicable laws and government regulations."

Legal Actions Brought Against Accountants

One of the critical responsibilities accountants owe their clients is the exercise of due professional care in the conduct of their duties. An audit firm could therefore be sued for failure to detect obvious red flags in a client's financial statements. This is precisely what happened when CliftonLarsonAllen, an audit and accounting services firm, was sued by its longtime client, Dixon. According to the State Journal-Register (2013), Dixon's lawsuit claimed that the firm had "missed obvious red flags such as bogus invoices." The fraud that CliftonLarsonAllen allegedly failed to uncover had been committed by Dixon's comptroller, who embezzled approximately $53 million over a period of 20 years. The lawsuit sought "compensation for the entire loss" (State Journal-Register, 2013).

On March 6, 2014, the SEC "charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, an international law firm where they worked" (SEC, 2014). According to the SEC, the defendants scrutinized the firm's financial statements line by line with the intention of artificially inflating "income and distort financial performance" (SEC, 2014). The company then used the inflated figures to raise significant funds in the bond market, thereby failing in their responsibility to third parties to present financial statements free of misrepresentation or fraud.

In the case of Seaboard Surety Co. v. Garrison, Webb & Stanaland, the district court judge indicated, as noted by Bruner and Haley (2007, p. 236), that:

"When an accountant prepares financial statements in the knowledge or under conditions under which the accountant should reasonably expect that the employer is to provide the financial statements to third persons for purposes of inducing these persons to rely on the financial statements, the accountant's contractual duty to perform the services skillfully and diligently runs to the benefit of such known third parties."

On December 3, 2012, the SEC initiated administrative proceedings against several accounting and audit firms for their refusal to furnish audit work papers that the commission intended to rely on in fraud investigations involving Chinese entities listed in the United States (SEC, 2012). Accountants and accounting firms have a responsibility to the government and its agencies to comply with certain requests in the course of such investigations. One of the key exceptions to Rule 301 applies precisely in those instances where a CPA or accounting firm is called upon to comply with government regulations and applicable laws (Perkins, 2004). The firms in question were charged with "violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets" (SEC, 2012).