Overview of Accounting and Law
Legal best practices can be defined simply as the maintenance of documentation and compliance with applicable law, regulation and best practices. The key concept is documentation and what you are required to have in order to demonstrate the requisite understanding and compliance with law, regulation and best practices.
Accounting best practices are rather simple in concept as well. One would seek to maintain accounting records that allow the firm to demonstrate its income, expenses, net worth and compliance with applicable law, regulation and best practices.
The key concepts operate in a similar manner. In many instances the internal and external reporting needs are similar. Accounting and legal best practices are closely intertwined.
For example , in the law there is a concept known as the "discovery" rule. This means that you may be required to keep certain documents spanning from when you know of a potential cause of action or suit even before the actual filing of a suit. In accounting there is something called the "retention period", which often refers to the retention of certain accounting records for a specified period of time, usually seven years, and this is closely related to the statute and period of limitations relevant to your state for suit. The time limitations for discovery and suit are similar, thus, you often find the intersection of legal and accounting best practices.
Legal Rules in Accounting
Legal requirements are all over the place within the accounting industry. From regulations, tax laws, and financial reporting requirements, accountants are required to pay attention to the law and understand what is required of them. There are many types of legal requirements that vary from state-to-state and may differ based on your firm.
Regulations
When it comes to regulation, accounting professionals must keep up with rules from the Securities and Exchange Commission (SEC) or the Public Company Accounting Oversight Board (PCAOB). These regulations are in place to help protect investors by ensuring that firm adhere to necessary laws.
Tax requirements
You’re probably more familiar with tax requirements through the IRS. Every accountant who prepares taxes must have a Preparer Tax Identification Number (PTIN), and certain forms of practice may also require specialized testing. To maintain a PTIN, accountants must file a valid renewal application every year and also must pay the associated user fee.
Financial reporting requirements
All accounting firms, at some point, may be required to file Form 10-K and 10-12G. This form every company that enters the public pool must submit. This form provides significant information about the company, including the firm’s risks and a list of its auditors. It’s important to note that the law requires this form to be certified by an external accountant.
Accountants In Legal Proceedings
Accountants can have a real impact on the outcome of a legal case. While they typically aren’t involved in the initial stages or the most high-profile parts of a legal process, accountants’ skills do come into play at critical junctures in many legal scenarios.
For example, when accounting records are needed to settle a legal dispute, the value of those records may be preserved through a forensic accounting analysis. A forensic accounting analysis is a systematic review of all of the relevant accounting records, usually with the purpose of quantifying economic damage to determine if an alleged act was harmful. In a divorce, that may mean quantifying community property in the process of asset division. In a personal injury, where a person’s earning potential and future wages may be on the line, it can help estimate future lost income. Or in a breach of contract claim, it can determine if the defendant’s actions caused economic damages.
Accountants also can contribute by providing expert witness testimony for a legal case. In a court, attorneys and judges highly value the use of expert witnesses, who are individuals with high levels of knowledge and skill in a subject that is not common to the general public. According to the National Association of Certified Valuators and Analysts (NACVA), "an expert witness [is] a qualified individual called upon to give testimony in court to help the trier of fact understand the evidence or to determine a fact in issue."
Accountants are an ideal choice as expert witnesses because they possess both the technical experience and background in a particular field, such as financial accounting. Their ability to interpret facts from either a financial or accounting perspective gives them the potential to have a significant influence on a judge’s or a jury’s view of the evidence in question.
While The Trial Lawyer’s Guide to Forensic Accounting for Legal Professionals notes that accountants aren’t necessarily courtroom experts, professional designations such as Certified Public Accountant (CPA), Certified Fraud Examiner (CFE) or Certified Management Accountant (CMA) may add to one’s credibility when being questioned on the witness stand.
Legal Implications of Accounting
Providing accounting, tax advice and compliance services to clients involves certain legal considerations accountants should be aware of when working in this industry. Confidentiality, liability concerns, and ethics are just some of the legal issues accountants face.
Accountants maintain financial records for their clients and have access to sensitive tax information. As such, they should take steps to protect the confidentiality and privacy of these records. Accountants should advise clients of their policies with respect to the collection, use, retention and protection of personal information.
In addition, accountants must be aware that improper disclosures or observations of confidential taxpayer information can result in significant civil and criminal penalties. If an accountant discloses a taxpayer’s information to anyone other than authorized individuals (i.e., submitted the authorized individual’s Form 8879 to the IRS), the accountant may be liable to the IRS. Furthermore, accountants must disclose their services, fees, payment methods, and any contributions to be made by the taxpayer and others must comply with the Circular 230 regulations.
There are different liability concerns accountants must be cognizant of such as negligence, breach of contract and disallowance of a deduction. Accountants must not forget that negligence and breach of contract are commonly used as alternative claims. Negligence claims may be avoided with a strong engagement letter. If the accountant is working in anticipation of a court action where liability insurance will be your principle defense, the accountant should also work with the attorney to ensure that the work product is produced with sufficient care to satisfy the applicable standard of care.
In order to avoid liability issues , accountants should enter into strong engagement letters with clients. The engagement letter should address any standard, common or potential liability issues. Providing a clearly detailed scope of engagement is also helpful in avoiding misunderstanding, can help defend against claims of negligence, breach of contract or breach of fiduciary duty, and can aid in recovering for unpaid services.
An accountant’s CPA license can be impactful upon meeting with other professionals in the field. Certain states have statutes that require a taxpayer to hire a CPA to do their taxes. Other states allow lien holders to go after the CPA for negligence in their work. In some states, only CPAs may represent taxpayers before the IRS. Some states even bar non-CPAs from offering tax services without being supervised by a CPA. Regarding representation before the IRS, a CPA must obtain an engagement letter with their client, allowing the CPA to deal with their client’s tax matters on their behalf.
An accountant’s professional conduct is also regulated by various organizations such as the AICPA. The AICPA’s Code of Professional Conduct is composed of principles as well as rules expressing the goals and values of the AICPA that all CPAs should follow. The accountant should also be mindful of whether there are other rules or guidelines defining relationships with clients and others. For example, the Sarbanes-Oxley Act of 2002 contains many provisions that are intended to improve the reliability, credibility, and transparency of financial reporting, and strengthen corporations’ internal controls.
Accounting and the Legal System
In addition to the formalised practice of keeping a firm’s accounts as part of the accounts department, accounting is relevant in legal practice in many ways. In order to be commercially viable, law firms, like all businesses, need to ensure that they are profitable and that their cash flows are managed correctly.
The practice of law
Law firms, like most businesses, are required to have an internal controls and governance structures in place particularly because there are significant financial transactions and management of client trust funds. Most law firms and lawyers carry professional indemnity insurances as a fallback, however, prevention is better. This section sets out some of the issues relating to risk assessment and management in the context of law firm accounting and related financial and accounting transaction management.
Trust accounts
Trust accounts are not owned by the law firm, but rather by the clients of the firm in whose matter the law firm is instructed. Therefore, particular care and attention always needs to be paid to trust accounting and client confidentiality is paramount. Law societies and bar associations have very specific guidelines for the operation and management of trust accounts.
State bar associations
Again, there are very specific guidelines for the accounting practices adopted by State bar associations (who themselves are not-for-profit organisations). Although these associations are not themselves law firms, nevertheless many of the same rules apply. The burden of accounting and risk management are still present albeit they are often overseen by a small administration team.
Tax
Governments impose tax obligations on law firms, and these need to be considered when evaluating risk assessment and management strategies. Those obligations may include: In addition, the costs associated with complying with these and any other obligations is itself a tax-deductible business expense of the firm. For example, if you employ a bookkeeper to undertake these tasks, the fees may be deductible where such expenditure is incurred in carrying on a business.
Accountancy and the Practice of Law
The future of the legal and accounting departments are directly tied to the evolution of the industries that govern them. In recent years, there has been a growing trend among large corporations to merge back-office functions of different departments, seeking greater cost efficiency and operational performance. This consolidation of administrative tasks is predicted to continue into the future, if not at a faster pace.
Innovative technologies are also evolving to meet the needs of these mergers, further driving integration of previously disparate departments. For example, automated invoicing solutions are now used to manage legal department billing , as well as accounting department record-keeping and reconciliation. Similarly, cloud-based document management software is anticipated to carry the lightest touch on compliance and a compressive overview on the management of documentation in all departments.
Integration of the accounting and legal departments could also be spurred by a shifting industry landscape. Expansion of various industries through deal making creates a ripple effector among supporting professional services. If the accounting and legal departments of a newly merged company or organization can operate in a more integrated way, they can shape new opportunities for their professional partners.