Being served as the defendant in a lawsuit can be an extremely unpleasant experience - and the risk to accountants has risen dramatically in the past few years.

Not only are judges less likely to dismiss a case on a motion for summary judgment, but juries are more likely to side with the party they perceive as a victim, said Bill Thompson, president of CPA Mutual Insurance Co. of America. Moreover, the economic downturn has affected the professional liability market in a number of ways, he indicated.

"Having a good professional liability plan helps me sleep better at night," said Vincent J. O'Brien, a Long Island, N.Y.-based CPA and lecturer. "We use engagement letters and screen our clients carefully."

Most carriers discourage suits for unpaid fees, O'Brien explained. "One of the biggest recommendations we make at our CPE lectures is to cut off services before you end up with a large unpaid fee. That eliminates the issue. It's important that practitioners be bold enough to do that because it's the best way to manage the situation."

Keeping up with industry knowledge is important in avoiding client risk, noted Louis E. Feinstein, CPA, a New York-based practitioner. "I'm on four tax committees of local and state associations, as well as a tax study group," he said. "That helps me keep up with what's happening in the field."

"When I deal with clients, I make sure that I put [everything] in writing so there's evidence I've told them about the issues and forms they need to comply with," he explained. "I try to get responses by e-mail, so there is a record of our correspondence."

"Every client signs an engagement letter - every one, even the Form 1040 clients," said Martin Davidoff, CPA, Esq., of Dayton, N.J.-based E. Martin Davidoff & Associates. "And for larger accounting clients, we have a conversation with the predecessor CPA. Sometimes we've already had that conversation in one context or another. For example, we might be called in to do a review or some specialized tax work, and the client lacks confidence in the predecessor accountant. It's possible we won't take on the client because of the risk involved, or because of our relationship with the other accounting firm."

Contrary to the advice of most carriers, Davidoff will sue for fees if necessary. "We're suing more clients because we're fed up with not getting paid," he said. "Some people just don't value accounting services."

Several years ago a client came in for a Form 1040 return, but never paid for it, Davidoff said. "Two years later, the same individual came in and asked if we did tax returns. He forgot that he had already scammed us two years ago!"

"There has been an increase in the number of firms that have asked me about unpaid fees," said Ralph Picardi, CPA, Esq., who specializes in helping firms avoid client risk. "What's going on is that in the past, firms were a little more aggressive. They would bill regularly, and when clients started to fall behind, they were more likely to suspend services and disengage. Now, they're more likely to give their clients some breathing room, and you're not seeing them being so aggressive. In a sense, it's firms saying, 'These are long-term clients, so let's cut them a little slack. It also comes out of the reality that it is a bad economy and firms are not that willing to get rid of clients. It's anathema to firms to be driving away businesses when they're not sure where new business is coming from."

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