Back to Basics: Top Risk-Management Tips

Back to Basics: Top Risk-Management Tips

By Ric Rosario

Despite the variety of changes that continue to take place in the regulatory and professional standards for CPAs, the fundamental principles of risk management for CPAs have remained remarkably constant over the years.

This constancy is mainly due to the high expectations the public has for CPAs, which are often expressed in the form of jury verdicts, sometimes referred to as jury or claims standards. Such standards have almost always been higher than the standards the profession has established for itself. CPAs who pay proper attention to their professional liability exposures gear their risk management techniques not only to what the profession expects of them, but also to what the public expects of them.

Most liability problems are preventable, and they rear their ugly heads when CPAs don’t follow basic risk management guidelines. What follows is a “top five” list of some of those basic guidelines:

1. Client screening. CPAs must be careful about their choice of clients. Background, reference and credit checks are invaluable. The quality of your clients has a direct impact on your practice. Remember that if you lie down with flea-ridden dogs, you will get fleas.

Client screening is not a one-time event. CPAs should continually analyze their book of clients. Even if you selected your clients carefully, your relationship with them may change, or the client may change his or her attitude or posture toward you. Sometimes the client whose integrity previously was unquestionable can become questionable.

Consider screening your existing clients on a regular basis, at least annually. You may use a formal checklist, or you may discuss clients and their current engagements during staff meetings, for example. If there are any problems, you will probably uncover them at one of those meetings.

2. Due care vs. “dabbling.” CPAs must know how to perform the services the client engages them to perform. That means practicing a type of service often enough in a particular industry or profession to be good at it, and staying current with regulations and standards of care through continuing professional education and self-study.

Camico claims data show high loss ratios for services that comprise less than 15 percent of a firm’s work. By the same token, loss ratios are low for services that comprise 65 percent or more of a firm’s work. In other words, “dabbling” is dangerous, and practice makes perfect (or close to it).

3. Engagement letters/documentation. CPAs must reach an understanding with the client about the engagement, and they should put that understanding in writing with an engagement letter. At a minimum, the letter should cover the nature of the work, the limitations of the work, the expectations the CPA has of the client, and the work to be performed by other professionals.

CPAs should also document the engagement as it evolves and changes, indicating advice given and decisions made. Camico has long advocated that CPA firms have a record retention policy in writing and that such a policy be applied consistently to all clients. The company’s claims experience shows that good documentation and record retention are crucial components of a firm’s defense against a lawsuit.

4. Disengagement. Proper client disengagement procedures should be used in order to avoid causing a loss for the client. When the firm decides to disengage, the relationship should be terminated professionally and formally, in writing. At a minimum, the disengagement letter should always contain the following:

5. Getting expert advice from outside. Firms can explore different options to best serve the client, such as alliances with other professionals or organizations that specialize in other areas. The upside of alliances is that CPAs can supplement their own expertise and better serve the client by utilizing other professionals for specialized knowledge and expertise.

The downside of alliances is that there are dangers in partnering with organizations that can expose the CPA to excessive liability. This is especially true with strategic alliance agreements that shift liability from the other party to you or your firm. Be sure to consult with a qualified attorney or risk advisor before entering into an agreement. CPAs can perform due diligence on other professionals, vendors or service providers by obtaining background, reference and credit checks in much the same way that new and continuing clients are screened.

Ric Rosario, CPA, CFE, is vice president of risk management services with Camico Mutual Insurance Co. He advises Camico’s policyholders and other CPAs on loss prevention principles and techniques.