One of the speakers at the New York State Society of CPAs’ ethics conference last week told a series of alarming stories about accountants who had been sued by their own clients for not doing more to warn them about their own risky financial activities.
Camico Mutual Insurance CEO John Dodsworth spends a lot of time with lawyers who are defending CPAs against negligence and malpractice claims that are often brought by the accountant’s clients.
Dodsworth, who will be retiring next year from the CPA-owned liability insurer after running the company since 1986, advised accountants to take a guarded attitude toward clients, particularly those who insist on taking risky positions on their taxes or their balance sheets. If the client is brought up on charges by the IRS or angry investors, frequently the first person the client blames is their accountant.
“I’ve never seen a situation where a client says, ‘It’s all my fault,'” said Dodsworth. “They push you to take the fall.”
Ever since the Enron scandal, accountants have been inundated with ethics rules of various kinds. But despite the rules, most accountants still feel beholden to preserving a relationship as the client’s trusted advisor.
That can lead accountants to take chances and, if they have a longstanding relationship, to assume the client is a good person who would never knowingly violate the law. Nevertheless, many clients in turn expect their accountants to warn them when they’re in danger of running afoul of the law. They assume it's their role to push the envelope and for the accountant to tell them when they’re pushing it too far. Clients often take the position that if the accountant says it’s OK, then it must be legal.
If clients are in danger of violating the law, then it’s the CPA’s duty to warn them, and even document the warning for legal protection. If clients insist on misrepresenting themselves to a bank, the IRS or investors, then the accountant may even need to act as a whistleblower.
This may seem to be a violation of client confidentiality, but in today’s litigious environment, it may be a necessity to protect the accountant from legal exposure or professional discipline from organizations such as the Public Company Accounting Oversight Board or the Securities and Exchange Commission.
Blowing the whistle on a client is, of course, not the ideal option and should only be exercised if the client refuses to listen and the accountant feels that simply ending the relationship may not be enough to offer legal protection.
“If you’re going to get sued, get sued by the right person, which is the wrong person,” said Dodsworth. In other words, it’s better to get sued by the client than the Justice Department.
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