CPAs sometimes need to struggle with ethical dilemmas when their clients bring messy problems to their door.
The advice from one liability insurance expert is to be careful. At a New York State Society of CPAs Ethics Conference on Wednesday, Duncan Will, CPA, a loss prevention accounting and auditing specialist at Camico Mutual Insurance Company, told several anecdotes, or “war stories,” as he called them, about CPAs who needed to deal with issues ranging from divorce to tax planning and elder abuse.
When one CPA began to suspect a client was being victimized by elder abuse, he worried about violating confidentiality rules by reporting his concerns.
“Our clients are getting older,” he noted. “I got a call from one policy holder asking, ‘What are my responsibilities? Who can I tell? What should I do?’” The answer might need to involve bringing in outside legal counsel, Will noted, adding, “You don’t want to leave that person high and dry.”
He acknowledged that ethical concerns can frequently differ from legal concerns. “The first hurdle will be over professional standards, but the second hurdle will be jury standards,” he said. “Just because something is legal, it may not be ethical. If you end up in court, and it is legal but not ethical, you can expect the jury to come down hard on you.”
He told the story of one CPA whose client convinced him to backdate a tax extension form. “We CPAs are all pretty much swell guys,” said Will. “We’re trying to help out our clients. So he filled out an extension as if it had been there all along." Unfortunately, it turned out the client had also filed another extension with a different date without telling the CPA, and the CPA landed in hot water.
Another CPA was doing something called “SUTA dumping,” setting up clients each year with a brand new company that had to pay only the minimal amount of unemployment insurance taxes. “That didn’t smell right to the jury,” said Will.
Camico sometimes tests out defense strategies with mock juries to see if they will work, but the results with a real jury can still be unpredictable. In one case, a CPA knew a client was trying to bury his personal expenses in his business, so every year he would go through the client’s expenses “with a fine tooth comb to make sure he uncovered all the stuff,” said Will. “Then the IRS came in and found some issues he hadn’t uncovered. The client got a notice to pay taxes and interest of $150,000.”
The CPA also got in trouble. Even though the two mock juries that Camico set up both seemed to agree that the client who was doing the tax evasion was a “schlemiel,” as Will put it, the actual jury nevertheless came back with a verdict that the CPA was negligent. He was getting paid to do the tax returns for the client, and he was actually being paid more every year to do the extra work of uncovering all the wrongly classified expenses and deductions on the client’s returns.
Will’s advice: “Disassociate yourself from anybody who is doing anything unethical.”