Liabilities, Liquidity and Cash Management


In the case at hand, the CPA firm of Good and Good donate the preparation of one tax return for the silent auction of a local non-profit organization. Typically, such a preparation of a tax return would costs a client approximately $450.00. However, at the silent auction, the winning bid for the free tax return is Mr. Pinchpenny, the wealthiest person in town. In the past, Mr. Pinchpenny has gone to a large public accounting firm located in Metropolis City to have his personal tax return prepared. On average, because of the complexity of his personal tax return, Mr. Pinchpenny has paid $5,000 per year for the preparation of his tax return.

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The first question that needs to be addressed with whether or not the certified public accounting firm of Good and Good should recognize a liability to Pinchpenny and, if so, at what amount. Under the circumstances of the case at hand, the firm of Good and Good should recognize a liability to Pinchpenny for the full amount of the preparation of the tax return. According to the standards of professional ethics and supporting law, an accountant is liable for all tax returns prepared by them, regardless of amount of time spent and money earned. The expectation in which they will be judged is based on whether or not the tax return was prepared in a professional manner as compared to how other certified public accountants would have prepared it. The law cares not about how much time was spent in comparison to how much money was made. Thus, Good and Good should recognize a liability to Pinchpenny for the full amount of the preparation of the tax return.

The next question that must be asked is whether Mr. Pinchpenny should recognize an asset and, if so, at what amount? Mr. Pinchpenny received the tax return as part of a silent auction held for the benefit of a non-profit organization. Although he paid $750.00 for the tax return preparation, this money was paid to the non-profit organization and not to Good and Good. Thus, his payment was a donation and not a payment for the services of Good and Good. For this reason, Mr. Pinchpenny may write off the $750.00 donation as an asset, but not as an expense for the tax return preparation. Regardless of whether or not Mr. Pinchpenny chooses to utilize the service will have no effect on whether or not an asset is recognized. Because the $750.00 was given as a donation to the non-profit organization, it will be viewed as an asset. Since the preparation of the tax return was given in exchange for the donation, it is considered a gift and thus not an asset.

Next, one must inquire as to whether the firm of Good and Good’s liability should be measured at out of pocket cost, at full costs, or at market value? As has previously been explained, if sued for professional malpractice, the court is most likely to hold Good and Good liable for the full amount of damages to Mr. Pinchpenny that was caused by their professional negligence. Thus, Good and Good’s liability is likely to be measured at market value.

The final question that needs to be asked is whether or not any amount in excess of what the firm of Good and Good intended to contribute to the charity event (approximately $450.00) be classified as a loss? Since this contribution was a charitable donation, the average amount for the preparation of a tax return can be written off as a donation. However, the amount of time actually spent, which is probably closer to the equivalent of $5,000.00, cannot be classified as a loss. In order to qualify as a loss, the work must be billed to the client as an expense and not paid. Here the client, Mr. Pinchpenny, was not billed anything as the agreement was that he was to receive a free preparation of his personal tax refund.

In the future, the firm of Good and Good should take precautions to prevent this situation from happening again. Because it is good publicity, and thus good for business, to make an annual contribution to the non-profit organization’s fundraising event, they should continue to do it (especially if such clients as Mr. Pinchpenny become regular clients as a result of the service). However, in order to prevent a loss such as that in the example, Good and Good should attach qualifications to their donation. For example, their donation could be the free preparation of an individual tax return up to a value of $450.00.


Aspatore Books Staff. (2005): Professional Liability Law: Leading Lawyers on Strategies for Minimizing Risk and Increasing Success in Professional Liability Suits. Aspatore Books, Inc.

Chorafas, Dimitris N. (2001): Liabilities, Liquidity, and Cash Management: Balancing Financial Risks. New York: Wiley & Sons, Inc.

Frey, R.G.G., Morris, Christopher W. (1991): Liability and Responsibility: Essays in Law and Morals. Cambridge: Cambridge University Press.

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