Editor’s Note: “War Stories,” drawn from Camico claims files, illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.

Teddy Easley, a CPA, was contacted by one of his larger tax clients, Bill Hugo, who said that in order to qualify for a mortgage refinance, he would need Easley to write a letter verifying that Hugo was self-employed, his business was financially sound and he was creditworthy.

At first blush, Easley gave little thought to his client’s request. He had been preparing Hugo’s tax returns for several years, and from all appearances, Hugo was the successful owner of an appliance dealership that had been a fixture in the region for more than two decades.

When Easley began to compose the letter, though, he started to think about the fact that he had never really verified the tax return figures Hugo had provided him. Easley realized that a letter verifying the sound financial footing of Hugo’s dealership was more of a business projection or forecast, though all he had ever done for Hugo was tax preparation based on the information Hugo gave him.

As Easley considered his misgivings, he received a call from Hugo’s mortgage broker, Sam Leghorn, who had been doing business in the area for many years. Easley mentioned his concerns to Leghorn, who told him that the dealership was obviously a financially sound business and had been for the 20 years that Leghorn had known Hugo. Leghorn also asserted that Hugo would not qualify for the refinancing unless Easley provided the verification letter.

Soon after Easley’s conversation with Leghorn, Easley received a call from Hugo imploring Easley to provide the letter. Hugo also mentioned the possibility of going to a more cooperative CPA firm, not only to obtain such a letter, but for other services as well—a clear implication that Easley might lose Hugo as a client.

Easley ultimately provided the letter, stating in part that Hugo was self-employed in the appliance business and that his business would continue to operate on a sound financial footing. The mortgage company, Creative Financial Group, approved the refinancing, based in part on Easley’s letter, but Hugo did not receive nearly as much in proceeds from the refinancing as Leghorn had led him to believe.

Hugo’s appliance business had actually taken a turn for the worse, and he needed all of the proceeds he thought he was going to receive in order to pay some large debts and keep his business afloat. He was unable to make his loan payments, and Creative foreclosed on the loan.

Creative also filed a lawsuit against Easley, alleging damages of $85,000 from Easley’s negligent misrepresentation of Hugo’s finances.

How to mitigate risks when responding to third-party requests

There are a number of protective measures a CPA should take when responding to a third-party’s request for information about a client—

• Be sure to receive written consent from the client before disclosing tax return information in a context other than the preparation and filing of tax returns, as directed by Sec. 7216 of the Internal Revenue Code (IRC), Client Consents.

•    Document only facts, including the services performed. Refrain from speculation or comments regarding future events (e.g., forecast future income or contingencies).
•    Avoid making conclusions that were not part of the services rendered to the client (i.e., do not make assurances regarding the accuracy or completeness of the information provided unless the scope of the services enable you to provide such assurances).
•    Do not provide any form of assurance regarding matters of solvency.
•    Stay away from words that expand, rather than narrow, your responsibilities. Keep the language of the letter simple and clear.

Conveying limits to clients
In addition to taking the steps above, CPAs should also educate their clients about what can and cannot be provided to a third party. This includes—

• Having a conversation with the client regarding the scope and limits of the services rendered.
• Clarifying for the client what can and cannot be provided under the scope and limits of the services rendered.
• Explaining that you are unable to provide an assurance opinion on the client’s financial position when you have not performed the requisite scope of services to do so.
• Stating that professional standards for CPAs prevent you from providing any form of assurance regarding matters of solvency.

It’s important to follow these guidelines—even when the client or financial institution gives you little or no time to act.

Suzanne M. Holl, CPA, is senior vice president of loss prevention services at Camico. With more than 18 years of experience, she draws on her Big Four public accounting and private industry background to provide Camico policyholders with information on a wide variety of loss prevention and accounting 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.