The Accountants Risk Control team at CNA, the endorsed underwriter of the AICPA Professional Liability Insurance Program, fields thousands of questions annually from CPAs seeking risk management advice. We've summarized our frequently asked questions below so you can easily access resources to manage professional liability risk in your practice. Engagement letters are so important that they have their own dedicated FAQ article, which can be found here.
Topic: Client or engagement acceptance and continuance
Understanding the risks that you allow into your firm and managing and monitoring them once they're there is incredibly effective in mitigating the risk of a future claim.
I have a new client opportunity. What do you think?
Be mindful of the company you keep. Working with clients that are the right fit for the firm affects staff morale, profitability, and professional liability risk. Read Client Acceptance: A Liability Gatekeeper to learn what to evaluate when considering a new client.
Is the new opportunity for a celebrity, high-net-worth, or high-profile client? Proceed with caution, as claims related to these clients can be substantial. Read Risky Business of Serving the Rich and Famous to learn more.
Uh oh. A client just told me they’re going through a divorce. I’ve heard that CPAs working with divorcing clients sometimes regret it. Any advice?
What you’ve heard is correct. CPAs often get caught in the middle of a divorce, whether it’s a business breakup or personal split. To learn how to avoid being collateral damage, read Client Breakups Can Create Malpractice Risk. For more specifics, read Considerations in Avoiding Becoming a Casualty in the Divorce Wars.
A client has asked me to perform a service that I have never provided. What are the risks?
ET Section 1.300.010, Competence, of the AICPA Code of Professional Conduct (the Code) requires that CPAs possess the "appropriate technical qualifications to perform professional services. Not sure where the line is drawn? The article Diversification or Dabbling? You Make the Call can help you with this determination. If a claim arises, a plaintiff attorney may question the CPA's competence of even the most qualified CPA as the reason an error was made.
I’m thinking about expanding my practice to provide client accounting/advisory services (CAS) or consulting services. What are the risks?
Many firms have grown through the provision of consulting and client accounting and advisory services. But such services are not without risk. Claims that arise related to these engagements are often the result of disagreements related to scope. Aligning expectations between the CPA firm and the client is critical to help ensure a smooth delivery of service and to mitigate the risk of a claim. Learn strategies to mitigate risk by reading Managing Risk Related to Consulting Engagements and Minding the Expectation Gap in a CAS Engagement.
My longtime client has asked me to be their trustee. What do you think?
It’s not surprising that many CPAs consider this request an honor. But this honor brings with it significant risk and the potential for a substantial claim. Why? Claims related to this service are not made by the longtime client but by nonclient trust beneficiaries who do not have a preexisting relationship with or loyalty to the CPA. Throw in family drama and squabbles over money, and you have a recipe for a very severe claim. Read The Unexpected Risks of Trustee Services for more considerations before agreeing to perform this service.
I no longer wish to provide services to a client. What should I do?
Whether the firm has outgrown the client, the client the firm, or if it's just no longer the right fit, sometimes the best decision is to terminate the client relationship. Read Take a Hike: Ending Client Relationships to learn about termination considerations.
Regardless of the reason, severing ties with a client should be done in a direct and professional manner and memorialized in writing. Tell the client what they need to do to move on from you, including any deadlines and the consequences to them of not meeting those deadlines. Instructions on how to write a termination letter, including a template are included in Client Termination Letters.
Topic: Outsourcing
My firm can’t find enough people. I’m considering using a subcontractor or an offshore provider to help. Thoughts?
Staffing challenges continue to plague the profession. Some firms are considering using outsourcing options, both on and offshore, to fill their needs. Before engaging a third-party, read Due Diligence with CPA Firm Subcontractors to better understand what professional liability risks exist, the professional standards that apply to outsourcing relationships, and what actions firm cans take to help mitigate risks.
Topic: Fee issues
Managing billing, collections, and realization not only helps manage the profitability of a CPA firm, but it also helps manage risk.
My deadbeat client owes me money. Can I send them to collection or sue for fees?
Please, please, please don't. Doing so nearly guarantees that the client will bring a counterclaim for negligence, and the lost time and money one spends defending the counterclaim almost always is more than what one would have received from a collection activity. Still on the fence? Read Think Twice Before Suing for Unpaid Fees for considerations to make before undertaking such activity.
OK. I won't sue for fees, but can you help me avoid this situation in the future?
Read Bad Billing Practices Can Affect Malpractice Risk for ideas and billing strategies to help stay in the black.
Sometimes, overruns or additional fees are due to the provision of additional services, which may be only tangentially related to the original service. This scope expansion can lead to financial risk as well as professional liability risk. Learn ways to better manage scope creep and related risks in Don't Let Scope Creep Lead You Out of Bounds.
Finally, having a difficult conversation about fees is one that many CPAs avoid or put off—to their detriment. Read Effective Communication to Help Avoid Litigation to learn how communication before, during, and after the engagement can help.
Topic: Claims
"War stories" about previous claims are always of interest — as long as they have happened to someone else.
How do large claims arise?
Read Early Warning Signs of a Large Malpractice Claim to learn common indicators of a high-severity claim, one of which is claims that assert the CPA failed to detect a theft or fraud at a client. This assertion is seen in claims relating to all areas of practice, not just audit. Read Fraud Risk Applies to all CPA Firm Services to learn ways to mitigate this risk.
Another warning sign of a large malpractice claim? Situations where the CPA is alleged to have violated the AICPA Code of Professional Conduct. Unfortunately, the mere perception of an ethical violation can thwart a claim's defense. Read Auditor Independence Threats and Malpractice Claims and Managing Conflicts of Interest to learn how questions of independence and objectivity can be problematic for a CPA. Then read A Framework for Maintaining Ethics Compliance to learn how to evaluate and respond to threats to and demonstrate adherence with the Code.
Large claims can also arise from seemingly benign actions (or inactions). For more claim stories, read Small Actions, Big Fallout: Lessons from large claims.
I’m a tax practitioner. I don’t need to worry about claims.
While one may think tax services do not result in frequent or large claims against the CPA, CNA’s claim experience says otherwise. Historically, approximately two-thirds of all claims asserted against CPA firms in the AICPA Professional Liability Insurance Program stemmed from tax services.
While claims related to tax services may be less severe than other services, there are exceptions. Certain tax clients can be higher-risk to the CPA firm and, consequently, have the potential to result in a larger claim. For example:
If a client pursues an aggressive tax strategy that sounds too good to be true, it likely is and can lead to a lead to a large claim against a CPA firm.
Read Avoiding Fallout from Aggressive Tax Strategies for more.
You've sufficiently scared me. What can I do to help mitigate the risk of a claim?
Client and engagement acceptance and continuance, engagement letters, clear and timely communication, documentation and knowing and correctly applying professional standards are universal risk management practices for
any service. Leverage resources available to you, such as those offered by the AICPA Professional Liability Insurance Program, including:
- Risk management training for all professionals offered via in-house seminar or webinar, AICPA webcast or on-demand self-study; and
For additional guidance and risk management articles organized by topic, please visit the AICPA Member Insurance Program’s Education & Resources Center.
A version of this article originally appeared in the Journal of Accountancy.
Sarah Beckett Ference, CPA, is a risk control director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.