Among the litany of incidents that might spark litigation against accountants, suing for recovery of fees sits high atop the list.

"Generally, a motivated client can develop an argument that a portion of the services they received fell below an expected standard of care," warned Emily Eichenhorn, director, and John McFaddan, risk control consulting director, of CNA Global Specialty Lines, on the American Institute of CPAs' insurance program Web site. "A lawsuit to collect unpaid fees [by the accountant] can motivate the client to pursue that counter-argument."

Rickard Jorgensen, chief executive of New Jersey-based Jorgensen & Co., administrators of the CPA Gold policy, agreed. "The most common source of professional liability claims is a countersuit for fees," he explained. "No one wants to walk away from an unpaid bill. But if you are considering a suit for fees, the firm should do a full review of any file that is the subject of the collection to ensure that there is absolutely no possibility whatsoever of a professional negligence counterclaim."

The practice of suing for fees can result in higher premiums, according to Jorgensen. "From an underwriting perspective, if there is a firm that demonstrates a lack of caution in this area - continuously suing for fees - it may attract an exclusion of coverage for claims arising out of countersuits, or alternatively an additional premium charge," he said.

"As a proactive measure to get premiums down, one company offered coverage with a fee dispute exclusion," he noted. "Given that this is the most common form of professional liability suit, it is a bad step for the accountant to take just to keep premiums down. It creates a troublesome hole in coverage."

"Normally, you're dealing with areas of practice or evaluating areas of practice for exposure, for example, tax, audit, compilation and review," said Jorgensen. "But in this case, what you're looking at is internal firm management and client relationships."

"There are certain techniques that the firm can implement within their management that can mitigate the possibility of a fee dispute," he said. "First, charge a significant retainer, which is not eroded by monthly billing. Second, regular billing - quarterly, monthly or whatever - but don't wait until the end of the engagement. Third, keep up a regular dialogue with the client to ensure that there are no surprises with regard to the amount of the fee. You want to avoid sticker shock on the part of the client. And finally, make sure that the engagement letter contains billing provisions and retainer provisions. If there should be a change to the magnitude or complexity of the assignment, then the firm should document this by amending the engagement letter."

NEW SERVICES, NEW RISKS

Meanwhile, the recession has highlighted a trend by small to midsized firms to broaden their services.

"We've noticed this for some time," said Homer Sandridge, vice president and manager of the professional liability business unit at Travelers Insurance. "The norm for smaller accounting firms has changed. Smaller firms, especially tax prep professionals, are being asked to render increased services. They now have a greater need for risk management than they did in the past."

"Small and midsized professionals who start rendering broader services really need to ensure they are using appropriate letters of engagement, so that both they and the client understand what the new service entails," he said. "They should go ahead if they're qualified, but make sure they have the risk management tools to do it in a wise way."

Sandridge explained that the typical tax preparer has always been asked many questions: "We believe that many more will start providing services outside the normal preparation of tax forms. This is the major shift. As they extend their practice into other areas, such as financial planning, estate planning, investment advice and consulting, their exposure expands. More than any other profession, they face the exposure of having so much confidential information."

"The file room may be getting smaller, but the risk of protecting confidential information is getting bigger," he added. "When an accountant leaves his briefcase someplace, is that a professional act? We're not sure, but we include coverage for it in our policies."

HEAD FOR COVER, FAST

Whenever an accountant feels the heat from a client, they should consult with their insurer. "Getting your carrier involved as soon as you can is important when you're afraid of a malpractice claim," said Amy Massaro, vice president of Aon Insurance Services, the administrator of the AICPA Professional Liability Insurance Program. "The quicker you get the liability carrier involved, the better the outcome for everybody."

The market is still soft, according to Joe Barnard, CPA and executive vice president at CPA Protector Plan. "There are a lot of insurance programs aggressively looking for business," he said. "Some have been in the market for a while and they're probably feeling profitability pressures. With the downturn in the economy, you'll usually see an uptick in the frequency and severity of claims." He noted that 25 percent of public companies are receiving a "going concern" opinion on their financial statements. "That means there's a question as to whether they can keep going as an ongoing entity," he explained - which may mean more clients who can't pay their fees.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access