By John F. Raspante

In today’s climate of increased scrutiny, CPAs need to pay extra attention to the everyday ethical issues that are part of performing client services. Professional liability claims often involve ethical violations or complaints stemming from CPAs not complying, or not appearing to comply, with professional, regulatory or legal standards.

Many of those standards can be found in the American Institute of CPAs’ Code of Professional Conduct; Statements on Standards for Tax Services (SSTSs); Generally Accepted Auditing Standards (GAAS); Generally Accepted Accounting Principles (GAAP); regulations of the various state boards of accountancy; regulatory agencies such as the Securities and Exchange Commission, the General Accounting Office and the U.S. Department of Labor; and legal standards for diligence and negligence.

Three of the most common complaints made against small- to mid-sized CPA firms involve:

• failure to return client records on a timely basis;
• failure to exercise due professional care; and
• conflicts of interest.

The two scenarios that follow are mini–case studies drawn from Camico claims to illustrate the first two of the preceding complaints. (All names have been changed.) Camico’s risk management advisers have provided the answers and will cover conflicts of interest in an upcoming article.

1. Returning client records. A former tax client of yours demands you provide copies of all of his records to his new accountant. The former client has yet to pay you for preparing last year’s tax returns.

How would you respond to this request? Would your response be different if the engagement had been terminated before it was completed? How would state board of accountancy rules affect your response?

AICPA Professional Standards, ET section 501, says holding back client records after they’re requested is considered an act discreditable to the profession. Furthermore, in most states, holding such records hostage for fees would be considered a violation of state board of accountancy rules, subject to a citation, a fine, or worse. From a loss-prevention standpoint, it’s usually unwise to add fuel to the fire by not cooperating with a former client’s transition to another CPA.

Much of this issue’s risk exposure stems from confusion over what constitutes client records. According to ET section 501.01, client records are any accounting or other records belonging to the client and provided to the CPA by, or on behalf of, the client. If an engagement isn’t completed, the CPA is required to return all records provided, regardless of whether or not fees have been paid.

If the CPA completed the engagement, he or she should be ready to provide work papers demonstrating information not otherwise reflected in the client’s books and records (e.g., adjusting journal entries or depreciation schedules), to assure the client’s financial information is complete. The CPA can require payment before releasing his or her work.

Note: Many state boards of accountancy have expanded the AICPA’s definition of client records to include such accountant’s work papers (e.g., adjusting journal entries, depreciation schedules and bank reconciliations) that would not otherwise be available to the client. Under state board rules, the CPA must turn over all client records and cannot hold this information hostage for fees, even though the AICPA doesn’t designate these work papers as client records. In such instances, the state board rule supersedes the AICPA rules.

Additional tax guidance: A significant number of tax claims against CPAs have resulted from clients receiving only oral advice. CPAs should put all tax planning advice in writing—specifically, an “informed consent” letter outlining the pros, cons, options, risks and consequences (in terms the clients will understand). Obtain client signatures as part of the consent.

2. Exercising due care. Your client, ABC Pest Control, for whom you’ve prepared corporate tax returns only, has asked you to perform a business valuation for the purpose of a buy-sell insurance contract for the two stockholders. You have never formally performed a business valuation and possess no ABV or CVA designations.

Would you provide this service to your client?

The fifth article of the “Principles of Professional Conduct” on due care requires the following: “A member should observe the profession’s technical and ethical standards strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.”

The code also covers professional competence. ET section 201, “General Standards,” provides that members perform only those services they are competent to complete, and that due care be exercised in the performance of all professional services. ET section 202, “Compliance With Standards,” provides that members must comply with all professional/technical standards, which, in the case of business valuation, falls under the Statement on Standards for Consulting Services. ET section 102, “Integrity and Objectivity,” has guidelines for member integrity and objectivity.

Falling short of the above standards can be construed as negligence. Some state laws consider it unprofessional to accept responsibilities that the licensee knows he or she is not competent to perform.

In this scenario a CPA accepts the engagement in jeopardy of potential ethics violations and malpractice allegations if his or her competence is called into question. The CPA’s competency is of utmost importance in specialized engagements. Juries and judges have a high expectation of CPAs and an even higher expectation of specialists.

Camico claims history supports the following: Engagements performed without an adequate basis in experience produce larger losses. “Dabbling” can be dangerous.

Exhibit 1, “Loss Ratios by Service Concentration,” shows that engagements outside a CPA firm’s main areas of expertise (less than 15 percent of service concentration) generate the highest loss ratios. The higher the percentage of service concentration (specialization), the smaller the loss ratio.

When in doubt, CPAs should seek assistance early from legal counsel or a risk adviser to help clarify professional standards and prevent potential problems.

For more information, contact Camico Mutual Insurance Company at 1-800-652-1772 or visit the company’s website at www.Camico.com.