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A prospective client is a potential customer who has been identified as a good fit for a company’s offerings based on factors such as industry, budget, needs, or engagement signals. Unlike a general lead, a prospective client is typically qualified, meaning they have demonstrated interest, meet key criteria, or have begun early conversations with the business.

Prospective clients are central to business development, sales pipelines, and client onboarding workflows, and often undergo screening, risk assessment, or due‑diligence checks before becoming active clients.

AI in Client Acceptance and Continuance (A&C): What the PCAOB Thinks

Artificial intelligence is actively reshaping research, planning, and risk assessment. For audit quality and compliance leaders, the most pressing question is how to use AI in A&C without triggering inspection risks.

The PCAOB’s Stance: AI Is an Assistive Tool, Not an Auditor

The PCAOB does not prohibit the use of AI, but it is clear on one point: technology is not a replacement for professional judgment. There is no “AI exception” to professional responsibility.

In its July 2024 Spotlight, PCAOB staff observed that while firms are investing heavily in generative AI, the most effective implementations focus on administrative and research tasks, with human partners retaining responsibility for final conclusions. Because A&C sits at the intersection of independence, ethics, and firm risk, it remains a high‑judgment area subject to heightened inspection scrutiny.

Bridging the Gap with Qualified Third Parties

Many firms bridge the gap between AI-driven efficiency and human expertise by engaging qualified third parties to perform A&C due diligence. However, delegating the task does not delegate the responsibility.

  • Supervision Standards (AS 1201):
    Lead auditors must supervise auditor‑engaged specialists. Firms cannot simply file a third‑party report; they must evaluate the specialist’s methods and assess the sufficiency and appropriateness of the evidence obtained.
  • The QC 1000 Factor:
    The PCAOB’s new Quality Control standard (QC 1000), effective December 15, 2026, places greater emphasis on managing “external resources.” Firms must implement robust controls to ensure that third‑party providers and any AI tools they use meet the firm’s standards for competence, objectivity, and reliability.

Navigating Inspection Risks

When it comes to PCAOB inspections, how AI is used in A&C matters just as much as whether it is used at all. Here are the red-flags:

  • Allowing AI tools to automatically determine “accept” or “decline” decisions
  • Relying on AI outputs that are not explainable or cannot be defended
  • Treating third‑party reports as final without a meaningful review
  • Succumbing to automation bias by blindly trusting a software-generated score

The Documentation Mandate

From a PCAOB inspector’s perspective, “the system recommended it” is not a defensible rationale. Documentation must be audit‑ready and clearly demonstrate:

  1. The Role of AI:
    Whether AI was used for research, drafting, data analysis, or other support functions.
  2. The Inputs:
    The data, sources, and prompts provided to the AI tool or third party.
  3. The Challenge:
    How the engagement team evaluated, corroborated, or challenged the AI or third‑party output.
  4. Professional Skepticism:
    Evidence that a human partner applied judgment and took responsibility for the final A&C decision.

 

Disclaimer: This communication is for general informational purposes only and does not constitute legal advice. The summary provided in this alert does not, and cannot, cover in detail what employers need to know about the amendments to the Philadelphia Fair Chance Law or how to incorporate its requirements into their hiring process. No recipient should act or refrain from acting based on any information provided here without advice from a qualified attorney licensed in the applicable jurisdiction.

April 23rd, 2026|Categories: Commercial Transactions Due Diligence|Tags: , |

SI case study: “A career in fraud”

A prospective client investigation was ordered on a company and its president, but the preliminary information was enough to reject this individual or any company under his control from the proposed business engagement. Initial court searches uncovered a 2003 criminal misdemeanor conviction for possession of a false identification to be used to defraud. The index did not provide much information and the file was destroyed by the court, so SI’s analyst turned to media sources to dig deeper. Sure enough, one article referenced guilty pleas entered by the subject and his business partner for hiring imposters to take the Series 7 securities brokers’ examination for them. Each was sentenced to a year of probation and fined $5,000. Articles from 2004 reported three civil cases for fraud in jurisdictions where the subject appeared to have no residential history. Follow-up research found that judgments in these lawsuits totaled more than $4.6 million. Several articles also linked the subject to a con artist who had admitted to defrauding ethnic organizations and individuals of $80 million during the late 1990s. And in 2007, the FDIC had executed a settlement agreement with the subject and (the same) business partner after they allegedly failed to seek FDIC approval before making an investment in an unregistered bank holding company. On the whole, this company president had been engaged in fraudulent activities for over a decade and no legal or regulatory action appeared to stop his mode of operation.

January 25th, 2012|Categories: Commercial Transactions Due Diligence|Tags: , |

A career in fraud

 

A prospective client investigation was ordered on a company and its president, but the preliminary information on the president was enough to reject the subject or any company under his direction from the possible business engagement. Initial court searches uncovered a 2001 criminal misdemeanor conviction for possession of a false identification to be used to defraud. The index did not provide much information and the file was destroyed by the court, so SI’s analyst turned to media sources to dig deeper. Sure enough, one article referenced guilty pleas entered in 2002 by the subject and his business partner for hiring imposters to take the Series 7 securities brokers’ examination for them. Each was sentenced to a year of probation and fined $5,000. Other articles from 2002 reported three civil cases for fraud in locations where the subject appeared to have no residential history, and further disclosed that the subject and his partner had been statutorily disqualified from working for a broker licensed by the National Association of Securities Dealers, ordered to disgorge profits and interest totaling $4,649,125 and each were fined $15,000 in civil penalties in 2006. Articles also linked the subject to a con artist who had admitted to defrauding Jewish organizations and individuals of $80 million during the 1990s. Most recently, the FDIC had executed a written agreement with the subject and (the same) business partner after they allegedly failed to seek FDIC approval before making an investment in an unregistered bank holding company. On the whole, this company president had been engaged in fraudulent behavior for nearly a decade and no amount of legal or regulatory action appeared to change his mode of operation.

March 26th, 2010|Categories: Commercial Transactions Due Diligence|Tags: , , , |
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