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ACCOUNTING

The Accountant Safety Test

Advice on how growing companies can protect their interests on the accounting front.
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Business owners should be able to rely on long-lasting relationships with their accountants to provide them with networking contacts, consulting advice, and increased access to capital markets. Unfortunately, those relationships may now be harder to forge, since the accounting industry in the United States is in turmoil.

Rumors persist about the financial instability of once-invincible "Big Six" firms. When accountants get a reputation for inept audits or less-than-pristine standards, state and federal tax authorities may focus their attention on all of the firm's clients.

For some suggestions on how growing companies can protect their own interests on the accounting front, Inc. turned to Michael J. Knight, a Fairfield, Conn., CPA who serves on the board of directors of the Smaller Business Association of New England. As a member of the American Institute of Certified Public Accountants (AICPA) Small Business Taxation Committee, he has appeared before the Senate and the Internal Revenue Service to testify on small-business issues.

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INC.: How can you tell if your accounting firm is financially sound?

KNIGHT: You can ask if there are any outstanding legal claims against it, especially on the malpractice front. The firm may not be willing to tell you, but your state society of CPAs can direct you to the appropriate state agency, which can tell you whether any formal complaints have been lodged against the firm, by either clients or creditors.

Meanwhile, you may also be able to negotiate certain kinds of information from the accounting firm if it wants to win or hold on to your business. At the very least the firm should be able to tell you if it has errors-and-omissions insurance. It should also be willing to give you the names of some of its clients in your industry and encourage you to talk to other business owners about the quality of their service.

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INC.: Quality is such an intangible. How can you be certain your accounting firm's standards are as high as they should be?

KNIGHT: Ask how the firm's most recent peer review went. CPA firms are reviewed every three years by an outside accounting firm that is either randomly assigned by the state society of CPAs or selected by the firm itself. The outside reviewer checks out the accounting firm's audit controls and procedures -- and it's not just a formality. Accounting firms really do fail if their standards aren't high enough. You should ask when the last review took place, who performed it, and whether your firm passed or failed. If the firm won't answer those questions, look elsewhere.

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INC.: Can you give us a wish list of other issues to ask about? Given the current environment, it seems as though business owners have a right to be as cautious as possible.

KNIGHT: Ask outright if the firm has ever been sued and what the outcome of the case was. If the firm won't answer, that may be cause for concern. Also find out whether the firm handles audits -- some won't -- and what its track record is. Ask how fully computerized its operations are. Then be sure to visit to see for yourself that what you've been told is true.

-- Jill Andresky Fraser

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For more suggested questions, read the free brochure "How to Choose and Use a CPA." Contact the AICPA Communications Division, 1211 Ave. of the Americas, New York, NY 10036-8775; (212) 575-6200.

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Last updated: May 1, 1991




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