Accounting malpractice occurs when an accountant knowingly uses inappropriate practices that harm the client, violating fiduciary trust and duty of care. Neglecting ethical and legal guidelines can lead to substandard performance and liability for damages. Evidence of a breach of conduct and harm to the client is required for a malpractice claim. Deliberate manipulation of financial performance is a major form of accounting fraud.
Accounting malpractice usually occurs when an accountant acts with the knowledge that an accounting practice was inappropriate and harm could occur to the client. Failure to comply with the ethical and legal guidelines of accounting standards can lead to accounting malpractice. The accountant is believed to have intentionally breached fiduciary trust and responsibility, beyond the use of poor judgment. Furthermore, the duty of care — the expectation that the accountant will act in the client’s best interest — is violated. A company’s fraudulent financial reporting can also result from accounting malpractice.
Based on accounting standards, an accountant is generally obligated to anticipate outcomes that could be harmful to clients. Accounting standards training and experience are intentionally ignored when performing the duties of an accountant. As a result, substandard performance may leave the accountant liable for damages to the client.
Most accountants should use discretion in accounting matters to avoid harm to the client who relies on the professionalism and judgment of an accountant. Otherwise, a lack of discretion could be considered negligent in duty and subject to an accounting malpractice suit. Neglecting fiduciary responsibility for the proper handling of financial matters may constitute accounting malpractice.
Accounting malpractice claims may arise if the evidence is related to the likelihood of accounting fraud and not the result of an unavoidable accounting error. An accounting error does not have the same legal weight as an accounting negligence. Mistakes can occur because an accountant doesn’t have the proper amount of experience to handle tasks with due care.
In general, the rule of law determining accountant malpractice involves evidence that a duty of care for financial protection was expected between the client and the accountant. When the accountant fails to comply with the law with a duty of care, a violation of conduct has occurred. The breach of conduct may result in financial damage to the client due to the abandoned fiduciary responsibility.
Some laws may define this as gross negligence, depending on what the evidence shows. The law may also require evidence of reasonable knowledge that the practice was inappropriate and that harm to the customer was likely to occur. In the absence of the accountant’s culpable action, proof that the customer would not have suffered damage may also be required.
A deliberate and premeditated practice to manipulate a company’s financial performance is also a major form of accounting fraud that is the result of negligence. Accounting fraud can occur by not including a full accounting of assets and liabilities in financial statements. In other circumstances, inflated sales revenue is typically used to boost a company’s income statement. Another example of accounting fraud is the under-reporting of accounts receivable records that have been written off as uncollectable bad debt.
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