Six Warning Signs of a Claim

By John F. Raspante

The following are six warning signs of a claim brewing on the horizon. While the symptoms and issues associated with claims are identified here, CPAs need to seek risk management advice that is tailored to each individual claims situation.

1) Clients Who Won’t Pay

Camico has often heard these words when CPAs call to discuss a new lawsuit: “The client was always slow to pay; I should have gotten rid of him years ago.”

Clients can develop grudges for a variety of reasons. Sometimes they end up owing so much money to the CPA that they believe asserting malpractice will help them avoid or reduce the receivable. CPAs often dismiss such assertions as just so much venting of dissatisfaction with financial situations unrelated to the CPA’s work.

Many lawsuits originate years after the CPA thought a matter was resolved, so it’s a good idea to consult a risk advisor when malpractice is alleged.

2) Uncooperative Clients

Clients who don’t provide information on a timely basis, or who don’t provide documents or information despite repeated requests, can lead to real problems. Poor bookkeeping causes the CPA to work harder to get a handle on financial information. Increased workloads lead to higher fees, which can lead to conflict.

Poor bookkeeping can also cause delays in obtaining information, causing the CPA’s work product to be out of date and useless to the client. Tax returns also may be filed late, causing the client to incur interest or penalties. In these instances, options include:

• Sending a letter to the client to confirm the problems, explaining that disengagement may be necessary if the client doesn’t cooperate; or
  
• Disengaging if you’ve already determined that the client can’t remedy the situation and isn’t worth the extra work and exposure.

3) Fraud/Embezzlement/Defalcation

Clients sometimes will assert that the CPA should have caught an embezzlement or defalcation by an officer or employee of the client’s company, and juries tend to believe such assertions. Even services that are not intended to detect errors, fraud or other illegal activity are not immune to these assertions.

The best way to protect yourself is to create a clear perception of your role. To do that, Camico recommends two types of letters to clients. First, engagement letters confirming:

• Objectives and nature of the engagement,
  
• Report(s) the accountant expects to render,
  
• Limitations of the engagement (such as not including internal control evaluation),
  
• Responsibilities of the CPA, and
  
• Responsibilities of the client (or its management).

Second, advisory letters explaining client exposures to the risk of embezzlement and the need for internal controls. Confirmation in writing that you have not been engaged to address those areas. Advise clients to screen their prospective employees, and consider offering internal control services to them. A significant number of lawsuits have resulted from CPAs not advising clients about what they should or should not do.

4) Subpoenas

There often is a maze of legal pitfalls associated with subpoenas. Sometimes an Internal Revenue Service (IRS) auditor or district attorney investigator will show up at a CPA’s door asking questions. Divulging confidential information to a third party without certain safeguards (such as client consent, a subpoena or a search warrant) is prohibited by the rules of the CPA profession.

If the subpoena is invalid for a technical reason, complying with it may put the CPA at risk of divulging confidential information to a third party without appropriate safeguards. Attorneys sometimes will subpoena a CPA in an attempt to obtain information to use against the CPA in their case. If your work possibly is involved in the underlying dispute, you should seek advice from your attorney or risk advisor, and counsel should represent you at your deposition.

5) Gray Tax Positions/IRS Audits

If your client takes a gray or aggressive position on a tax return, confirm the client’s decision (and that the client shall bear responsibility for all tax, penalty or interest exposure) in a letter. A significant number of tax claims against CPAs result when tax clients are given oral advice. Make it a policy to put all tax planning advice in writing.

If a taxing authority audits your client, and the auditor is taking an adverse position on a tax return decision that you told your client would pass muster, call your risk advisor or tax counsel. You may need help presenting your position. If the audit is going south and the client is grumbling that this is your fault, take the client’s complaints seriously, no matter how baseless they may sound, and call your advisors.

6) Divorce or Partnership Disputes

If your clients are in a dispute, you may be brought into it via “conflict of interest” charges. Partners in litigation and divorcing couples often will assert that their CPA gave the other partner/spouse a benefit to their detriment. Partnerships and marriages require equal treatment of each partner by the CPA, regardless of ownership percentages or who is paying the fees.

It may be appropriate for the CPA to obtain a conflict of interest waiver letter signed by the clients. At the same time, the CPA shouldn’t get too comfortable with disclosure as a form of protection, as it can be argued later that the clients’ consent was not “informed” by a third party such as an attorney. It also may be appropriate to disengage from one or both parties.

As in all situations involving disputes with clients, it is a good idea to contact your legal or risk advisor if you perceive any potential problems.