Question

Describe the legal liability CPA firms face today.

Answer 1

There exist extreme legal liabilities for CPA firms in today's legal environment when they are unable to detect fraud. The CPA firm's liability arises due to breach of contract conditions or duty, negligence in the performance of prescribed duties, fraud, or failing to offer duty of care to the clients. The investors, stockholders, other parties mainly rely on the CPA's audit report. The materially misstated financial reporting by CPA may mislead investors and creditors. They may face substantial losses. In these situations, they may face litigations Many reforms are introduced to boost the efforts of CPA firms to detect fraudulent financial reporting. Legal liability exists in the form of a penalty system. Due to the fear of penalty, the auditors make strong efforts to detect possible frauds with decreases the chances of fraudulent reporting by auditees.