Due professional care definition
/What is Due Professional Care?
Due professional care is a guiding principle under which professionals should carry out their work in a competent manner, with a deep understanding the professional standards that they are required to uphold. This concept is a key issue in auditing, where audits are to be carried out in accordance with the standards set for the profession. Its proper application helps to ensure that high-quality audits are conducted, and that the resulting financial statements issued by clients can be relied upon. As long as due professional care is exercised by auditors, the investment community will have a high degree of confidence in their work.
The auditor is usually obligated to exercise due professional care by the terms of the engagement letter; the obligation exists even if it is not specifically stated in the engagement letter.
Proving that an auditor has exercised due professional care constitutes a complete defense against any charge brought by a plaintiff. This proof constitutes the bulk of the work in defending against lawsuits. Unfortunately for the auditor, proving one’s case can be difficult when subsequent events turn out to be worse than the auditor could have expected, in which case the defense needs to also address the issue of whether the auditor should have seen a future event coming.
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Example of Due Professional Care
An outside auditor has entered into an agreement to conduct an audit of a client’s financial statements. While conducting this audit, the auditor finds a transaction that appears to be an anomaly, and could be a case of fraudulent financial reporting. The auditor wants to observe due professional care, and so takes the following steps to investigate the transaction:
The auditor brings in an expert to examine the transaction, since she recognizes that she does not have the expertise to do so.
The auditor collects a substantial amount of information about the transaction, to ensure that she has a firm basis of information upon which to base an evaluation.
The auditor reviews the applicable auditing standards to ensure that the steps she is taking will thoroughly address the issue, including escalating the matter to the senior management of the client.
The auditor does not take the client’s explanation of the transaction at face value, thereby maintaining an appropriate degree of professional skepticism.
By taking these steps, the auditor is exercising due professional care in the conduct of her work.