Because errors and omissions (E&O) claims are so episodic, it is usually not fair to infer a trend from seeing a run of certain types of claims. However, we have recently seen a spate of claims founded principally on an alleged failure by an auditor to communicate with those charged with governance at a client.
As we have emphasized for years, no single loss prevention principle is more important than clear and timely communications with clients. And, in the context of auditing, we have also stressed the need to insist on having an effective channel for communications with the board of directors for nonprofits and entities with multiple or complex ownership structures. Unlike privately-held businesses where ownership control and management are indistinguishable, these entities often lack effective oversight and control of management, leaving them vulnerable to management overreach or misconduct — and leaving you exposed to a claim for their ineptitude.
Nonprofit boards are typically comprised of unsophisticated volunteers wholly dependent on being directed by management. Minority or passive owners may also be serving as directors in name only, or the board may be dysfunctional. While it is true that responsibility for correcting these issues is not your problem — it is just as true that they can become your problem in the hands of a trial lawyer determined to tap your malpractice insurance!
All too often, auditors curry favor with management (especially the CFO) by omitting or diluting important findings in the management letter, or by delaying reporting while management scurries to take remedial action. The dilemma is that it is precisely when a management point is most critical of management that it is most important to observe the provisions of AU-C Sec. 260 for the need, timing, content and manner of communicating with entity governance.
From the standpoint of loss prevention, such communications are the perfect occasion for protecting the historical record so that it accurately reflects your professional independence from management and full compliance with professional standards. The hallmarks of a successful communication are:
Use clear, direct, and easy-to-understand wording (that a jury can understand).
Do not pull punches (e.g., drop “everyone has this condition”).
Act promptly (especially when there is a chance that corrective action can help).
Confirm oral communications in writing (sufficiently to prove they occurred).
In the end, your mantra should be: Don’t let your client’s problems become your problems!
For more information, follow the source link below.
