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Risk Management: Documentation will help protect your firm

By Anthony Cooper, J.D., MBT
Published Date:
Feb 11, 2016

Risk Management: Documentation will help protect your firm


Good documentation is one of the best defenses a CPA has in the event that a client takes legal action. Inadequate or improper documentation can be a costly mistake. Consider the following late tax season scenario.

The CPA is having a rough tax season, and when April rolls in, he is scrambling to get information from clients to complete their returns. One difficult client never seems to be able to submit tax information on time. When an extension payment has to be calculated for the client’s return, the CPA gets the client on the phone to obtain some missing Schedule K-1 data needed.

At one point in the conversation, the client says “$90,460,” but the CPA hears “$19,460” and enters that amount into the appropriate box in the software program. The program then calculates the tax due payment, resulting in a substantial tax underpayment. 

Months later, when the CPA finally has the client’s actual K-1 data that was missing in April, he sees the discrepancy between it and the amount he used and realizes that the client owes a much greater tax amount, with accompanying late payment penalties. When the client sees the penalty amount, he demands that the CPA pay it.

Loss prevention tips
An effective tool for preventing the problem of inadequate or improperly documented client extensions is a written confirmation of the amounts used to calculate the extension payment. The confirmation is sent to the client with the extension form, giving the client an opportunity to review the information and to change any information that appears incorrect, prior to April 15. The confirmation also serves as a record of the client’s representations so that the client cannot initiate an action against the CPA if the client incurs a late payment penalty.

If you need information at the last minute to complete a return, have the client send the data via email or fax. The email or fax becomes part of your records, support and documentation.

Jury standards
Studies have shown that jurors generally consider CPAs experts in documentation. Indeed, forensic accountants frequently provide expert-witness testimony in trial cases.  Falling short of that professional reputation may be viewed by the public as negligent and below the standard of care for the services rendered. Since the public appears to place the burden to document on the CPA, even an informal email exchange documenting a brief telephone conversation can help the CPA.

Based on your professional liability insurer’s claims experience, a legal defense is typically more successful when based on what the CPA has documented, rather than on what the CPA simply recalls. On the other hand, documentation can come back to haunt a CPA if it doesn’t meet certain standards. Keep the following pointers in mind whenever you document:

Always document significant communications, and follow up in the following circumstances:

  • A change in the scope of an engagement
  • Negative information (e.g., the tax return is already late or a client is facing an audit)
  • Judgment calls (e.g., the former CPA took an aggressive position that the client is aware of and has consented to)
  • Client decides to take material action based on a discussion.

Document only the facts. Refrain from speculation or comments on personalities in your notes.

Document as soon as possible. Place notes in the client’s file and maintain only one set of client notes. This provides members of your firm with easy access to up-to-date communications.

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

Keep pads and pens next to every phone.

This simplifies the process by making documentation a reflex action when the phone rings.

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

Seek legal counsel if documentation isn’t sufficient. If you’re advising a client on a complex exchange, you may want to have your legal counsel review the documentation before passing it on to your client.

Anthony Cooper, J.D., MBT, is a tax specialist with Camico (, responsible for providing policyholders with information regarding corporate income, gift and estate tax issues.

 For information on the Camico program, call Camico directly at 800-652-1772, or contact: (Upstate) Reggie DeJean, Lawley Service, Inc., 716-849-8618, and (Downstate) Dan Hudson, Chesapeake Professional Liability Brokers, Inc., 410-757-1932. 

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