The current financial environment has placed increased pressure on both accountants and their clients, which in turn can lead to increased risk of liability.
"There's additional pressure on clients in a competing marketplace, and this puts a downward pressure on fees that CPA firms can collect," said Alvin Fennell, vice president of sales and underwriting at Aon, the national program administrator for the American Institute of CPAs' professional liability insurance program. "Having to do more and earning less revenue puts a strain on internal controls. It may lead them to take on engagements in which they're not proficient."
For example, an accountant who is more familiar with tax work or bookkeeping may begin to look into audits, or an audit firm may look to do audits in industries in which it lacks expertise, opined Fennell: "There's a blurring of lines as to what the client base should be. Regional firms are now competing with smaller firms for clients - they're not walking away based on size. At the same time, smaller firms might get into trouble because they don't have the experience in a more complicated industry."
From the tax practitioner's perspective, the increasing complexity in professional regulation is a growing issue, noted Joe Wolfe, assistant vice president of risk control at CNA, the underwriter of the AICPA program. "Tax law tends to be complex," he said. "It's important that the practitioners understand how the different issues impact their clients, and the advice they give their clients will be an ongoing issue. When providing tax advice,practitioners shouldinform clients that their advice is as of that date, based solely on the limited information provided,is subject to change based on changes in tax regulation and law, and that they assume no responsibility for providing updated advice at a later date."
COMMUNICATION IS KEY
Foreign bank account reporting is another continuing issue, Wolfe pointed out. "The UBS case got everyone's attention," he said. "We continue to get inquiries over our hotline on this. If a client brings to your attention previously undisclosed foreign income, you need to consider how and if to communicate with your client, because the accountant-client privilege is narrower than the attorney-client privilege. In some cases it may be best to work through the client's attorney when you provide advice on these issues."
Client re-acceptance is a way of dealing with changing circumstances, explained Ron Parisi, CPA, Esq., national program director at Camico Mutual Insurance Co. "Don't take for granted your original assumptions about your clients when you first took them on," he said. "We're seeing a dramatic change in the stability of individual clients. CPAs aren't looking hard enough at their current client lists. They should be taking appropriate measures in considering whether to continue with a client, and if so, what additional steps must be taken to adequately service the client while protecting the firm from liability."
"When clients get in trouble, their CPA tends to get in trouble," he said. "When a firm attempts to collect an outstanding receivable and takes the matter into the courtroom, the automatic response is a counterclaim for professional negligence. Meeting professional standards doesn't necessarily avoid professional liability claims."
Revised regulations under Code Section 7216 have raised issues for accounting firms about the way they handle client information, according to Ralph Picardi, CPA, Esq. "It affects large firms with multinational offices, or small ones dealing with outside service providers," he said. The Sec. 7216 rules limit tax preparers' use and disclosure of information obtained during the return preparation, and provide both criminal and civil penalties for unauthorized disclosure. "We're not sure to what extent there will be criminal prosecutions," Picardi said. "It's important to remember that professional liability policies don't typically cover criminal behavior. They wouldn't provide a defense except to the extent an action might spawn a civil claim."
Picardi, who defends accountant malpractice cases and provides risk management services to a number of accountant programs, noted that there might be coverage questions. "We don't really know, because those cases haven't come in yet," he said. "But I would imagine that if there are disseminations that lead to identity theft that can be traced to wrongful disclosure by an accountant, both civil claims and criminal prosecutions might result."
"Data security laws operate both at the state and the federal level," Picardi said. "Basically they require accountants to adopt whatever the state of the art is for data security measures for a firm of a given size. For a big firm, the standard will naturally be higher."
RED FLAGS, EMBEZZLEMENT
The Federal Trade Commission's Red Flags Rule has been postponed a number of times, he noted, and was most recently extended to Dec. 31, 2010. The rule requires creditors and financial institutions to address the risk of identity theft, by developing and implementing written identity theft prevention programs to help identify, detect and respond to "red flags" that could indicate identity theft.
"The AICPA, as well as the American Bar Association and the American Medical Association, have filed actions against the FTC to prevent it from enforcing the Red Flags Rules against their members," he said. In April, a court ruled that the FTC should delay enforcing the rules on accountants in public practice until at least 90 days after a ruling has been handed down in the ABA's suit, which was filed first.
There also have been an increasing number of claims brought against accountants due to embezzlements, according to Kimberly Stone-Vilim, CPA, underwriting manager at Insight Insurance Services. "When this happens, the client will likely blame the accountant, no matter what services the firm performed," she said. "One of the best defenses in these cases is a well-worded engagement letter that clearly points out the services the firm was hired to perform."
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