The American Institute of CPAs’ Accounting and Review Services Committee clarified a standard on financial statement preparation as part of a client advisory services engagement.

The new Statement on Standards for Accounting and Review Services (SSARS) No. 27, Applicability of AR-C Section 70 to Financial Statements Prepared as Part of a Consulting Services Engagement, says a CPA is not required to apply AR-C Section 70, Preparation of Financial Statements, when the preparation of financial statements is not the primary objective of an engagement that’s performed in accordance with CS section 100, Consulting Services: Definitions and Standards. It will be issued in early April.

Client advisory services, such as controllership and CFO services, have been growing rapidly in recent years and often involve an outside accountant assuming responsibilities that can include acting as the client’s outsourced CFO.

While weighing the potential change, the committee determined that financial statements issued when a CS section 100 is performed present no harm to the users of that statement. The revised language clarifies that while the section is not required to be applied, the accountant is not precluded from applying AR-C section 70, in whole or in part. 

“Our goal is to ensure that accountants have the necessary knowledge, tools and resources to serve their clients efficiently and to the best of their ability,” said Sue Coffey, CEO of public accounting at the AICPA, in a statement Monday. “As CAS grows as a service area, natural questions arise as to how to best apply certain standards. Clarifying these standards allows accounting professionals providing these valuable services to do so confidently.”

Tax collection projections are down. Refunds are up. That’s a formula that could dampen U.S. government revenue and, if it persists, portend an earlier deadline for Congress to raise the debt ceiling — or risk a federal payments default.

That’s a potentially worrying sign for bond market watchers and the broader economy if the trend continues. Most estimates show the U.S. running out of funds to cover all of its obligations on time in the late summer or early fall, but some forecasters have also warned weak revenue intake could mean a breach as soon as late May or June.

The U.S. Treasury’s cash balance dropped to $281 billion on Thursday, according to the latest data from the department. Beyond that stockpile, it had, as of March 26, only $207 billion of so-called extraordinary measures left to continue to fulfill its financial obligations.

Tumult in Washington — cuts in the ranks of Internal Revenue Service agents spurred by Elon Musk’s Department of Government Efficiency, along with a tariff campaign that’s damaging consumer and business sentiment — could be contributing to lower-than-predicted tax collections, experts said.

The Congressional Budget Office on Wednesday warned about the potential for an earlier-than-anticipated debt ceiling breach, saying its baseline X-date estimate is for August or September, but noted that, if the government’s borrowing needs are significantly greater than projected, the Treasury’s resources could run out as early as late May.

So far this year, IRS receipts are coming in slower than projected. Filing season statistics show that the number of returns the agency has received is down 1.1%, compared with a similar time frame for 2024. Tax payments tend to spike in the final weeks before April 15 as filers who owe wait as long as possible to send in their money. As for refunds, however, the total is 4.6% higher than last year.

GOP wrangling

Congress doesn’t yet have a plan to address the debt ceiling if the X-date creeps closer on the calendar.

Senate Majority Leader John Thune is currently working to advance a Republican-led budget resolution that would include, with President Donald Trump’s tax cuts, at least a $4 trillion debt ceiling increase. But GOP lawmakers are just at the beginning stages of a lengthy and politically complicated negotiation that’s unlikely to be wrapped up in two months.

If the risk of a payment default seems more likely for May, Republicans will be pressured to temporarily set aside the tax-cut bill and focus solely on the debt ceiling. That would mean needing to rely on Democrats — because it’s unlikely there’d be a sufficient number of Republicans to back a debt-ceiling hike if it lacked the attraction of being combined with tax cuts. And that in turn would kick off another politically perilous game-of-chicken that could spook bond markets.

CBO Director Phillip Swagel told CNBC on Thursday he expects revenue tied to the April 15 individual tax-filing deadline and the June 15 due date for taxpayers with automatic extensions will tide the Treasury’s coffers over for a period.

Auditing question

“We are pretty confident that the government will get past those,” he said. “And then over the summer is the challenging part.”

Treasury Secretary Scott Bessent has said his department will offer a debt-ceiling update in early May, after the bulk of the tax receipts come in.

The biggest unknown is whether DOGE’s moves to reduce IRS staffing will hamper the agency’s ability to collect taxes and taxpayers’ willingness to pay up. Reductions in the IRS workforce could come with “dramatic increases in noncompliance,” according to a recent Yale Budget Lab report.

“People might change their behavior in terms of filing taxes, and again, sort of be more aggressive in taking those deductions to try to sort of evade taxes,” said Richard Prisinzano, director of policy analysis at the Yale Budget Lab. 

“If we don’t see a payment boost then it’s more likely that people have changed their behavior,” he added. They know “the IRS is going to be in a weaker position to audit,” he said.

Shai Akabas, vice president of economic policy for Bipartisan Policy Center, said that while it is too early to tell, he’s more optimistic about the Treasury’s runway to keep paying the government’s bills.

“It might be a slightly higher possibility this year because of the unique factors that are going on,” Akabas said. “But we still think it is less than likely that all those factors will materialize in a way that leads to a large miss on tax season.”

Audit engagement risk is something all auditors think about and incorporate into their decisions, but recent research suggests that they might not be thinking about it as broadly as they should. 

To better understand audit litigation risks, we joined our colleagues in interviewing 39 very experienced audit litigators, including attorneys, trial consultants, and expert witnesses. These experts averaged 31 years of experience in audit litigation and provided us with a comprehensive perspective on trial preparation. Our study, published in “The Accounting Review,” was inspired by earlier work with litigators suggesting that auditors systematically underestimate audit litigation risk because they don’t adequately understand all the factors that can affect it.

Even when auditors follow all the standards and perform a high-quality audit, they can still be sued if a client or third parties believe they made a mistake. This includes honest errors, fraud that they didn’t catch, or misperception about what an audit actually covers. Even a squeaky-clean audit won’t immunize you from litigation, and there are several other factors that can affect the outcome of a case, many of which come into focus during trial preparation. 

So, it’s not enough to focus on audit quality — it’s also critical to focus on what would happen if your work were ever to go before a judge and jury.

Think like a litigator

Based on our research, the first thing you need to do is start thinking like a litigator and learn to think about your audits through a legal lens. The “Elaboration Likelihood Model” from psychology research provides a helpful way to think about this. 

ELM explains how people — including judges and juries — are persuaded, and it depends on how deeply they think about the information they’re given. “High elaboration” means jurors are thinking critically about the evidence and the facts of the case, while “low elaboration” means they’re going more with their gut feeling and emotions.

Here’s what our research found:

• Plaintiff attorneys prefer to keep things simple and emotional, encouraging low elaboration by jurors. They know that auditing standards are complex, and most jurors don’t have the background to understand them. They’ll often use arguments like, “This company lost millions of dollars. The auditor should have caught it.” This kind of argument preys on the misconception that many jurors have — that an audit is a guarantee of accuracy or future business success.
• Defense attorneys, in contrast, want jurors to use high elaboration. To achieve that, they need to spend a lot of time educating jurors about the technical details of auditing, the relevant standards, and what an auditor’s work actually showed. They essentially have to teach a crash course in auditing, which is difficult and time-consuming, and there’s no guarantee that it will work.

The venue and jury matter

The venue of the trial and the potential jury pool are also really important and are things that auditors can consider in advance. Our research found that:

• Federal courts tend to be more favorable to auditors than state courts because federal judges are usually more sophisticated and knowledgeable about business matters.
• Jurors with high levels of education and business experience are more likely to understand the technicalities of an audit and won’t be as swayed by emotional arguments. This means that if your client is headquartered in a city with a lot of college graduates and white-collar jobs, you’re less likely to face a runaway jury.
• Jurors with a strong hometown bias are unlikely objective, and are more likely to side with a local company over an outside audit firm. This hometown bias can be a real problem, especially for smaller firms.

What can auditors do?

So, what can auditors do about all of this? The good news is that our research suggests there are several steps you can take.

During client acceptance, firms should:

• Consider the potential trial venue and jury pool. It’s a little morbid to think about, but ask yourself, “If I were to be sued over this audit, where would the trial be held? What are the demographics and sophistication of the jury pool in that jurisdiction?” Auditors should incorporate these factors into their risk assessment and management processes. 

And during the audit, you should:

• Go beyond merely complying with auditing standards to minimize the possibility of errors or misstatements that could lead to litigation. This means taking a proactive approach to risk assessment and considering factors that might increase the likelihood of a lawsuit when planning an audit engagement, even if they aren’t explicitly required by the standards.
• Be clear about the scope of the audit and your responsibilities in your engagement letter and throughout the engagement. Make sure the client understands what you are doing, what you are not doing, and the limitations of an audit. Document all communications with the client and make sure your workpapers clearly reflect the work that was done.
• Write audit workpapers with potential litigation in mind. Use clear and concise language that a layperson could understand, and explain how your work meets the relevant auditing standards.

Beyond our findings, it’s also important to:

• Consider engaging with trial consultants to help you assess your litigation risk in different jurisdictions and develop strategies for dealing with different types of juries.
• Educate the public about auditing to dispel the common misconceptions about your role and responsibilities. The more people understand about what auditors do (and don’t do), the less likely they are to make unreasonable demands and file frivolous lawsuits.

By being aware of the legal context and planning ahead, you can better manage your litigation risk. This doesn’t mean you should drop clients with higher business risk, but it does mean you need to be aware of all the factors that can contribute to audit litigation risk and assess your ability to mitigate those risks. In doing so, you can continue to provide valuable services to your clients and protect the integrity of the financial reporting system.

The insights from our research make one thing abundantly clear: Focusing on compliance with auditing standards is not enough. To truly protect yourselves, your firms, and the investing public, auditors need to broaden their perspectives and develop a sophisticated understanding of the legal and social context in which they operate. 

This requires auditors to be more proactive, more communicative, and more willing to challenge the status quo. Ultimately, the future of the profession may depend on your ability to adapt to the changing legal landscape and embrace a more holistic view of audit risk.