An examination of factors associated with lawsuits against accountants for nonaudit services

This study evaluates the factors that are present in tax/consulting (TC) services litigation against accounting firms. It addresses the number of such cases that have occurred, the types of TC services that lead to engagement failure and litigation, the legal basis of the litigation, the monetary damages assessed in these cases.; Lexis served as the data source. Case analysis of four TC litigation actions identified some factors that might escape notice via mere contemplation of the nature of TC services litigation.; The analysis of all 143 cases in the census indicates that tax services invoke the largest amount of TC litigation. The practitioner's client (rather than third parties) normally initiates the TC litigation, and the plaintiffs are typically individuals or private firms. Many of the cases are against small-and medium-sized accounting firms. The plaintiffs' in TC actions often make multiple allegations that usually include charges of professional negligence on the part of the practitioner. The analysis also indicates that the practitioners prevail more often in bench trials than in jury trials, and the jury trials tend to result in the highest damage awards.; The result of the study also presents some implications for practice management and public policy. Consulting practices in accounting firms should be encouraged to develop more refined TC practice engagement letters. The engagement letter should clearly define the scope of the practitioner's duties as well as the timing, costs, and objectives of the TC services. Public policy setters charged with establishing rules and guidelines relating to the scope of services for CPA firms should be mindful of the fact that allied services not only are associated with relatively low levels of litigation risk, but also stabilize practice economics. Such an economic buffer may be essential to firm survival when confronting the impact of severe outcomes from audit litigation.