[IMGCAP(1)]Scope creep—the enlargement of the job the CPA was hired for—can have both positive and negative implications for an accounting practice.
If things go right, it can enlarge the practice, build a bond with clients, cement a bond with the client and enhance the bottom line. But if things go wrong, it could result in the loss of the client, damage to the accountant’s reputation and an ugly lawsuit.
“Scope creep is off-the-cuff advice on steroids,” said Deborah Rood, risk control consulting director at CNA. “You may be playing golf with a client, and they say, ‘Hey, I was thinking about this investment. What do you think?’ If you give a flip answer, that’s one thing, but if you take a look at the prospectus and give your thoughts on it, that’s scope creep. Going from ‘off-the-cuff’ to scope creep involves more work.”
“When I was in practice I was constantly asked for off-the-cuff advice,” she said. “It was a constant battle to draw the line. When you’re thinking about a new or a continuing client, be aware whether scope creep is something they expect. Smaller clients tend to expect it as part of your full service. They don’t realize they’re asking for scope creep. They consider you their advisor, and they’d rather go to you before they would go to an attorney. You’re part of the team, whereas an attorney is not someone they deal with on a daily basis. And you want that advisor role.”
Rood said the CPA is largely responsible for controlling scope creep. “It’s the accountant’s responsibility to identify it and tell the client that this is not what you were engaged to do,” she said. “Tell them you need to get a new engagement letter, and there may be additional fees. That provides an easier way to bill for your very valuable services. It can be a new engagement letter or an addendum to the engagement letter, but get it in writing that you are providing that additional service. When you bill the client, just say clip the engagement letter onto the statement.”
“The scope of services in the engagement letter is the key,” Rood emphasized. “Suppose your client on the golf course says that they’re thinking of investing in a restaurant. They ask if you’ve had other clients do this, and how it has worked out. The engagement letter should say that you’ll review the prospectus and advise them on the tax implications. It should be clear that you’re not offering investment advice or assessing their entire portfolio based on their risk tolerance.”
“We had a CPA who was engaged in providing bookkeeping and tax services, and that was what he said in his engagement letter,” Rood said. “The client and the accountant developed a relationship, and he asked the CPA to review his portfolio on a quarterly basis. But the engagement letter was not amended, and no new engagement letter was made to provide for the additional services.”
“As often occurs, something bad happened,” she added. “In this case, the financial advisor had stolen $4 million from the client, and the CPA was sued. Our defense said that the engagement letter clearly stated the CPA was not responsible for detecting fraud. However, the plaintiff’s attorney argued that the engagement letter hadn’t been changed, was therefore inapplicable to a review of the client’s portfolio and therefore the responsibility clause did not apply.”
“We anticipated the cost of defense and the likelihood that the jury would find in favor of the client, and decided we did not want to go to trial because of the likelihood of losing,” she added. “Therefore we decided to settle.”
“The good news is that the CPA is in control,” said Rood. “If done correctly, the CPA can manage scope creep for their financial gain.”
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
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access