Whether you're a CPA who works for yourself or you run an accounting firm that employs a dozen people, getting hit with an accounting malpractice claim can be devastating. In addition to shouldering the cost and time it takes to defend your firm, there’s also the specter of added stress and reputational harm.
The bottom line: Even firms who faithfully follow professional standards can find themselves in a situation where they have to respond to a malpractice claim. Here's a look at eight factors that can increase the pain when accountants get sued—and what can be done to help prevent and respond to such a situation if it happens to you.
1. Providing Services Outside of Engagement Scope
Generally speaking, CPA professional services fit within three basic categories: tax advice and planning, assurance services, and consulting. While there are a myriad of other services provided under these three broad umbrellas, the services a CPA firm provides under a particular engagement should not deviate beyond the scope defined in the engagement letter. When they do—whether through scope creep, a difference in engagement expectations, or because additional services were requested but not put into writing—you run the risk of a malpractice claim being pursued against you.
2. Not Using Engagement Letters
Among other things, an engagement letter defines the terms of the accountant-client relationship, laying out the terms and scope of service, fees, the responsibilities of each party, the limitations of the engagement, dispute resolution guidelines, and more. Even if they are not required by applicable professional standards, it's still a good rule of thumb to use one with every client engagement, regardless of the type of service provided.
3. Not Taking Advantage of Risk Management Resources
The American Institute of Certified Public Accountants (AICPA) has a treasure trove of risk management and technical resources for members. These resources can assist in keeping CPA firms and their employees knowledgeable and up to date on engagement planning, changes to federal and state laws, risk trends, statistics, and the like. Additionally, accounting professionals and firms that have professional liability insurance through the AICPA Professional Liability Program can receive risk control advice, tools such as sample engagement letters and more—all without triggering their deductible.
4. Poor Documentation
Poor documentation can be harmful for almost any business, particularly for CPA firms where claims can arise several years after services are provided long after memories have faded. Contemporaneous documentation of how services were delivered, of client conversations and more can speak for you if a claim is made.
5. Poor Client Acceptance and Continuance
Without a doubt, not following industry practices regarding client acceptance and continuance can put a CPA firm at significant liability risk. Review public records and consult with the client’s prior accounting firm. Conduct solid research to determine whether the client is litigious or engages in business practices that are less than ethical. Beyond conducting routine due diligence and reviews of clients and prospective clients, firms and CPAs should likewise honestly assess themselves to determine whether or not a potential client's industry and/or the services requested are a good fit for the firm.
6. Conflicts of Interest
Whether due to clients divorcing, a nasty business split, or a real estate deal among multiple parties that's gone south, CPAs need to beware of potential conflicts of interest that can emerge when clients are no longer on the same team. Perceived favoritism toward one party could lead to litigation from another. Similarly, breach of contract and/or confidentiality issues are likely to arise when client groups or marriages disband.
7. Fee Disputes
Sometimes clients don't pay or opt to pay 10 cents for every dollar you bill. Sometimes firms and clients disagree on what services have and haven't been rendered. While it can be tempting to sue for payment of unpaid fees, doing so can sometimes result in counter-litigation, resulting in a worse financial situation than if a firm had just taken the loss and disengaged from the client. Good client acceptance and continuance protocols and engagement letters will go a long way in reducing the likelihood that you'll face a fee dispute.
8. Lack of Expertise
If you or your firm do not have the requisite expertise regarding a particular industry or niche service, then don't take on the engagement until you've completed the necessary training to competently take on the client or have hired someone that can.
How CPAs Can Help Protect Themselves
There is a lot CPA firms can do to help protect themselves against an accounting malpractice claim. Here are some tips:
Screen and re-screen your clients. Doing some research into potential and current clients can go a long way into protecting you from potential problems down the road.
Always have an engagement letter for every client engagement. If the client seeks a service outside the scope of the letter, get it in writing.
Document all conversations with your clients. Sometimes, subtle changes to the scope of the services can be requested in a conversation. Making a habit of documenting client interactions will memorialize such requests.
Review and renew engagement letters annually. Relationships change, and memories are short and notoriously imprecise. An annual review of all client engagement letters will help ensure that you and the client are on the same page.
Stop and think before pursuing a fee collection action. Taking a small loss and terminating a no or slow paying client can sometimes be better business-wise than inviting a retaliatory and costly lawsuit.
Familiarize yourself with your client's business and industry. Doing so not only helps you to offer advice of real quality, but advice also that can provide protection against the types of problems that can result in accounting malpractice claims.
Get professional liability insurance that's tailored for CPAs, and make use of all the benefits, resources, training that the policy affords you.
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