May 2000

Documentation Helps Firms Avoid Lawsuits

By Ric Rosario, CPA

Loss prevention techniques and practices are the CPA's greatest weapon against a client lawsuit. This article discusses the importance of documentation of your work papers. Future articles will offer additional advice to limit liability exposure.

Why bother documenting? Documentation can help you avoid or at least minimize liability claims. It helps improve communications between your clients and staff and also provides a value-added service to clients while creating potential new services.

Vital Areas to Document

Certain engagements tend to increase client perception problems because the scope and areas of responsibility are unclear. Documentation is absolutely vital in these areas of your practice, including:

FINANCIAL OR BUSINESS MANAGEMENT

* funds handling
* valuations
* projections
* rent-a-controller services
* trustee work
* aggressive tax positions

MANAGEMENT ADVISORY SERVOCES

* business/investment advice
* systems analysis
* valuations/forecasts
* mergers/acquisitions

Always document significant communications and follow up. It is especially important to follow up with written communication in the following circumstances:

* Change in the engagement's scope,

* Negative knowledge (e.g., a tax return is already late or the client faces an audit),

* Judgment calls (e.g., a former CPA is taking an aggressive position to which the client is aware and has consented), and

* Client's plan to take material action on discussion.

Only document the facts: Refrain from speculation or comments on personalities in your notes. Document everything as soon as possible. This means placing notes in the client's file and maintaining only one set of client files. This provides members of your firm easy access to up-to-date communications.

Make documentation a habit. Top management needs to set an example by initiating all documentation procedures that they require of their staff. All staff members need to learn and use effective documentation skills.

Document efficiently. Use a systematic approach that includes key words and concepts. Define both the results and actions.

Seek legal counsel if documentation alone is not sufficient. For example, if you advise a client on a complex exchange, you may want to have your legal counsel review the documentation before passing it on to your client.

Keep documentation pads next to every telephone. This simplifies the process by making documentation a reflex action when the phone rings. *

Ric Rosario is vice president of loss prevention services at Camico Mutual Insurance Co.

Editor's Note: This is the first article in a new column on risk management techniques. Camico Mutual Insurance Co., the NYSSCPA's new affinity partner for professional liability insurance, will offer monthly tips on how CPAs can avoid lawsuits. See the April issue of The Trusted Professional and www.nysscpa.org for more details on the company's services.