Accounting

The litigator’s lens: A new perspective on audit risk management

Published

2 months ago

March 31, 2025

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.

Accounting

XcelLabs launches to help accountants use AI

Published

1 hour ago

June 6, 2025

Business Finance News

Jody Padar, an author and speaker known as “The Radical CPA,” and Katie Tolin, a growth strategist for CPAs, together launched a training and technology platform called XcelLabs.

XcelLabs provides solutions to help accountants use artificial technology fluently and strategically. The Pennsylvania Institute of CPAs and CPA Crossings joined with Padar and Tolin as strategic partners and investors.

“To reinvent the profession, we must start by training the professional who can then transform their firms,” Padar said in a statement. “By equipping people with data and insights that help them see things differently, they can provide better advice to their clients and firm.”

The platform includes XcelLabs Academy, a series of educational online courses on the basics of AI, being a better advisor, leadership and practice management; Navi, a proprietary tool that uses AI to help accountants turn unstructured data like emails, phone calls and meetings into insights; and training and consulting services. These offerings are currently in beta testing.

“Accountants know they need to be more advisory, but not everyone can figure out how to do it,” Tolin said in a statement. “Couple that with the fact that AI will be doing a lot of the lower-level work accountants do today, and we need to create that next level advisor now. By showing accountants how to unlock patterns in their actions and turn client conversations into emotionally intelligent advice, we can create the accounting professional of the future.”

Katie Tolin

“AI is transforming how CPAs work, and XcelLabs is focused on helping the profession evolve with it,” PICPA CEO Jennifer Cryder said in a statement. “At PICPA, we’re proud to support a mission that aligns so closely with ours: empowering firms to use AI not just for efficiency, but to drive growth, value and long-term relevance.”

Accounting

Accounting is changing, and the world can’t wait until 2026

Published

2 hours ago

June 6, 2025

Business Finance News

The accountant the world urgently needs has evolved far beyond the traditional role we recognized just a few years ago.

The transformation of the accounting profession is not merely an anticipated change; it is a pressing reality that is currently shaping business decisions, academic programs and the expected contributions of professionals. Yet, in many areas, accounting education stubbornly clings to outdated, overly technical models that fail to connect with the actual demands of the market. We must confront a critical question: If we continue to train accountants solely to file tax reports, are we truly equipping them for the challenges of today’s world?

This shift in mindset extends beyond individual countries or educational systems; it is a global movement. The recent announcement of the CIMA/CGMA 2026 syllabus has made it unmistakably clear: merely knowing how to post journal entries is insufficient. Today’s accountants are required to interpret the landscape, anticipate risks and act with strategic awareness. Critical thinking, sustainable finance, technology and human behavior are not just supplementary topics; they are essential components in the education of any professional seeking to remain relevant.

The CIMA/CGMA proposal for 2026 is not just a curriculum update; it is a powerful manifesto. This new program positions analytical thinking, strategic business partnering and technology application at the core of accounting education. It unequivocally highlights sustainability, aligning with IFRS S1 and S2, and expands the accountant’s responsibilities beyond mere numbers to encompass conscious leadership, environmental impact and corporate governance.

The current changes in the accounting profession underscore an urgent shift in expectations from both educators and employers. Today, companies of all sizes and industries demand accountants who can do far more than interpret balance sheets. They expect professionals who grasp the deeper context behind the numbers, identify inconsistencies, anticipate potential issues before they escalate into losses, and act decisively as a bridge between data and decision making.

To meet these expectations, a radical mindset shift is essential. There are firms still operating on autopilot, mindlessly repeating tasks with minimal critical analysis. Likewise, many academic programs continue to treat accounting as purely a technical discipline, disregarding the vital elements of reflection, strategy and behavioral insight. This outdated approach creates a significant mismatch. While the world forges ahead, parts of the accounting profession remain stuck in the past.

The consequences of this shift are already becoming evident. The demand for compliance, transparency and sustainability now applies not only to large corporations but also to small and mid-sized businesses. Many of these organizations rely on professionals ill-equipped to drive the necessary changes, putting both business performance and the reputation of the profession at risk.

The positive news is that accountants who are ready to thrive in this new era do not necessarily need additional degrees. What they truly need is a commitment to awareness, a dedication to continuous learning, and the courage to step beyond their comfort zones. The future of accounting is here, and it is firmly rooted in analytical, strategic and human-oriented perspectives. The 2026 curriculum is a clear indication of the changes underway. Those who fail to think critically and holistically will be left behind.

In contrast, accountants who see the big picture, understand the ripple effects of their decisions, and actively contribute to the financial and ethical health of organizations will undeniably remain indispensable, anywhere in the world.

Accounting

Republicans push Musk aside as Trump tax bill barrels forward

Published

2 hours ago

June 6, 2025

Business Finance News

Congressional Republicans are siding with Donald Trump in the messy divorce between the president and Elon Musk, an optimistic sign for eventual passage of a tax cut bill at the root of the two billionaires’ public feud.

Lawmakers are largely taking their cues from Trump and sticking by the $3 trillion bill at the center of the White House’s economic agenda. Musk, the biggest political donor of the 2024 cycle, has threatened to help primary anyone who votes for the legislation, but lawmakers are betting that staying in the president’s good graces is the safer path to political survival.

“The tax bill is not in jeopardy. We are going to deliver on that,” House Speaker Mike Johnson told reporters on Friday.

“I’ll tell you what — do not doubt, don’t second guess and do not challenge the President of the United States Donald Trump,” he added. “He is the leader of the party. He’s the most consequential political figure of our time.”

A fight between Trump and Musk exploded into public view this week. The sparring started with the tech titan calling the president’s tax bill a “disgusting abomination,” but quickly escalated to more personal attacks and Trump threatening to cancel all federal contracts and subsidies to Musk’s companies, such as Tesla Inc. and SpaceX which have benefitted from government ties.

Republicans on Capitol Hill, who had — until recently — publicly embraced Musk, said they weren’t swayed by the billionaire’s criticism that the bill cost too much. Lawmakers have refuted official estimates of the package, saying that the tax cuts for households, small businesses and politically important groups — including hospitality and hourly workers — will generate enough economic growth to offset the price tag.

“I don’t tell my friend Elon, I don’t argue with him about how to build rockets, and I wish he wouldn’t argue with me about how to craft legislation and pass it,” Johnson told CNBC earlier Friday.

House Budget Committee Chair Jodey Arrington told reporters that House lawmakers are focused on working with the Senate as it revises the bill to make sure the legislation has the political support in both chambers to make it to Trump’s desk for his signature.

“We move past the drama and we get the substance of what is needed to make the modest improvements that can be made,” he said.

House fiscal hawks said that they hadn’t changed their prior positions on the legislation based on Musk’s statements. They also said they agree with GOP leaders that there will be other chances to make further spending cuts outside the tax bill.

Representative Tom McClintock, a fiscal conservative, said “the bill will pass because it has to pass,” adding that both Musk and Trump needed to calm down. “They both need to take a nap,” he said.

Even some of the House bill’s most vociferous critics appeared resigned to its passage. Kentucky Representative Thomas Massie, who voted against the House version, predicted that despite Musk’s objections, the Senate will make only small changes.

“The speaker is right about one thing. This barely passed the House. If they muck with it too much in the Senate, it may not pass the House again,” he said.

Trump is pressuring lawmakers to move at breakneck speed to pass the tax-cut bill, demanding they vote on the bill before the July 4 holiday. The president has been quick to blast critics of the bill — including calling Senator Rand Paul “crazy” for objecting to the inclusion of a debt ceiling increase in the package.

As the legislation worked its way through the House last month, Trump took to social media to criticize holdouts and invited undecided members to the White House to compel them to support the package. It passed by one vote.

Senate Majority Leader John Thune — who is planning to unveil his chamber’s version of the bill as soon as next week — said his timeline is unmoved by Musk.

“We are already pretty far down the trail,” he said.