Duffett shared her tips for avoiding trouble as a panelist in a day-long seminar May 14 on "Accountant's Liability: What Every CPA Needs to Know to Protect the Practice." Duffett and five legal and regulatory experts provided advice to a nationwide audience of accountants in an instructional seminar sponsored by the Accounting Continuing Professional Education Network (ACPEN). The seminar was made available via satellite broadcast and, for the first time, interactive webcast, and earned accountants CPE credit for their participation.

 

Here are the 10 trouble spots Duffett advised CPAs to avoid from the insurance underwriter's perspective.

 

1. Bad client selection. The fees generated by a questionable client are never enough when a claim comes in. Accountants should take a thorough look at the client's reputation, check references and determine the reasons they are changing accounting firms. "Bad clients will switch firms until they find one willing to accede to their wishes," Duffett said. "Good clients may be aggressive, but will back off when their accountant says 'no' and they'll respect you for having drawn the line."

 

2. No engagement letter. Always send a concise engagement letter, even if the client refuses to sign it. If clients are uncomfortable signing a letter, Duffett advised "tell them that your insurance company is requiring it. Many insurers won't directly state this, but it's a strong consideration in acceptance and rating guidelines." Engagement letters should be updated annually or whenever additional services will be performed.

 

3. Embezzlement within client's office. Nearly half of all claims over $100,000 are due to fraud on the part of the client. Unethical behavior by a client is one of the foremost reasons for disengagement. "It's often safer to take a stand against a client than it is to defend a suit from a third party," Duffett said. "If the choice is being sued by a client because you didn't agree with a questionable situation, or being sued by a third party because you went along with the situation, it's better to be sued by the client. It's easier to win and you'll sleep better at night."

 

4. Technical standards violations. To err is human, and accountants are definitely human. Although technical errors are usually honest mistakes, the majority of technical errors can be avoided. Appropriate independent review of the work within the accountant's office, before it is released to the client, will often catch errors and will minimize the possibility of a professional liability claim. Continuing education is another key component of avoiding technical standards violations.

 

5. Real or perceived conflict of interest. These situations are difficult to defend, even if fully disclosed, in the event of a claim. "Third parties have a tendency to either disown knowledge of the conflict or claim that they were unduly persuaded by the accountant's involvement," Duffett said. "Perceived conflicts of interest can be just as dangerous, even if the accountant hasn't received any direct benefit." Most perceived conflicts arise out of referrals. "When you feel you must offer a referral when asked, it's imperative you provide two or three options."

 

6. Client expectations are different than the work performed. This is a corollary to #2, and extremely important if a suit is filed. "Outline not only what you will do, but highlight what you will not do," Duffett advised. "Many claims are the result of the gap between the client expectations and what the accountant was actually paid to do."

 

7. Services provided are beyond the expertise of the accountant. When establishing a relationship with a client, accountants should perform a self-evaluation of their firm and its abilities to perform the services required. "You not only need the relevant expertise, but you must have adequate manpower to properly staff the engagement," Duffett said. She warned accountants not to oversell their services. "Flowery marketing phrases like 'the best' or 'exceeding your expectations' will come back to haunt you when presented to a judge or jury as a rebuttal to your position that your services met industry standards."

 

8. Advising more than one party to a transaction without significant disclosures and waivers. This is another corollary to #2, preparing a concise engagement letter, and also a corollary to #5, avoiding conflicts of interest. "Every year we defend claims where the accountant represented two parties in a transaction, usually with the client's blessing and encouragement," Duffett said. For example, a father is passing the family business onto the next generation. Rather than pay for an independent accountant to become familiar with the business that is already well known to both parties, the father and children insist the accountant can easily provide a fair valuation and help structure a buy-out/retirement package for dad. But when the children falter at running the business on their own, the accountant's value no longer looks as fair. Who will get blamed for this failure?

 

9. Lack of internal procedures within the accountant's office. Follow consistent billing practices and document everything. "Giving proper attention to business practices in the invoicing and collection is a much better alternative than having to file a lawsuit for collection of fees," Duffett said. "Suing for fees is a surefire way to face a six-figure counter-suit for malpractice." Concise and legible file notes on client discussions are important to give credibility to your testimony and professionalism in the event of a claim. Good documentation will discount 'recollections' of the claimant.

 

10. Lack of disclaimers in prepared financial statements (even audited ones) stating their purpose and use. This is a very specific part of managing client expectations, and goes further to mitigate the expectations of third parties. Often, the accountant is preparing financial statements that also are needed for obtaining credit or some other type of contractual benefit for the client. The accountant must clearly delineate any limitations in the scope of the work in the financial report as well as the engagement letter. Knowledge that the statements will be presented to a third party for a specific purpose creates a need for the accountant to actively protect against professional liability claims from all recipients of the work.