Liability of an accountant

Outside the private world of accountants, no one really knows what an accountant is responsible for, and what he can be held liable for. This article answers that in short style, to the extent possible.


Two types of accountants:
You have RAs & AAs. RegisterAccountants are generally the most expensive and should be employed only in larger companies (50> employees, 6mlj> assets, 12mlj> sales). These RAs are charged with auditing. Accountant-administrative consultants are generally active in SMEs. Then you should think from small sole proprietor to fairly large company, but under the criteria of 50 employees etc. These prepare financial statements & provide business advice.

Audited financial statements (RAs) have an important role in society. Many stakeholders (suppliers, customers, employees) have an interest in ensuring that the report reflects reality. For example, if staff build up a pension with the employer, you want to make sure the employer is REALLY building up a pot to pay the pension later.

Financial statements in the SME segment, that is, for AA accountants, have a much smaller role in society. However, these financial statements also contain components on which stakeholders can base choices. For example, every company is required to publish a balance sheet, showing its equity. If a company has too little, or heavily negative equity, a supplier may decide not to do business with that company. If the filed financial statements contain errors, and, for example, the equity is presented more rosy, the supplier can hold the company liable. Of course, the supplier only finds out about it after it has already gone wrong.

Who then is liable? The Accountant or the company?
The auditor is responsible for providing financial statements in accordance with reporting requirements. The company is responsible for the accuracy of the financial statements. Thus, the company is responsible if the financial statements should misrepresent reality. A misleading representation could even lead to administrative liability where the company’s shareholder is held privately liable.

And the accountant? It can be dragged before the Auditors’ Office. Every week cases are heard in Zwolle where the accountant risks up to €8,100 as a fine. Of course the legislature has legal remedies to punish more harshly in exceptional cases, but as a rule that does not happen. Punishment for economic crimes is also relatively mild. Here is a practical example (AHOLD circa 2002).

Key figures accounting scandal AHOLD:

  • Sales in 2000 were presented 26% higher (51.5 billion from 40.8 billion)
  • Operating income in 2000 was presented 44% higher (2.3 billion from 1.6 billion)
  • Sales in 2001 were presented 23% higher (66.5 billion from 54.2 billion)
  • Operating income in 2001 was presented 42% higher (2.7 billion from 1.9 billion)

In plain human language: you tell everyone that you earn almost half a x more. So what are the potential opportunities:

  • Banks give you lower interest rates because you are solid
  • Your stock price goes up because you are solid
  • You have a stronger trading position with suppliers because you are solid

But then suddenly you’re almost half as solid. That’s annoying for the people who trusted you and invested in you. The aforementioned benefits then go in the completely different direction. You are less solid because you lie about your numbers. And in 2002 (1st year after fake reporting years), the company suffers a loss of 1.2 billion euros. In addition, the company settled with a fine of about 8 million in the Netherlands. In America, $937 million is being settled through a class action lawsuit. In Connecticut, $297 million is being arranged. The charges against the auditor were dismissed by the judge.

So over a billion in dollars and 8 million in Dutch euros were lost. What kind of punishment did these people receive?

  • Van der Hoeven (chairman of the board) was fined €30,000 by the OM and paid €5 million to Ahold
  • Meurs (financial director), community service 240 hours (6 full work weeks), fine of €100,000 (OM) & €600,000 to Ahold
  • Andreae (board of directors) fine €30,000
  • Accountant (reprimanded(=taken to task) by Chamber of Auditors), civil action pending

Summary: $1.2 billion & €8 million in fines for the Ahold company, versus €5.6million in fines for the perpetrators. For fraud on a billion-dollar scale, you run the risk of being fined several tons. In other words, it pays off. Because these directors just got their millions of bonuses & salaries, however, a fine should now be deducted from that. Shelf fillers have to work literally tons of hours to earn even a fraction of that income. While those same box fillers are not causing billions of dollars in damage.

This flinging of money seems like a faraway show. But consider where else all that money could have gone? Minimum wage workers who would earn more, more money to socially responsible causes, more taxes so that we as a nation have more money left over for infrastructure etc. This kind of practice really stops progress.

Source figures AHOLD: