BY PETER LARKIN
When CPAs learn that I devote most of my legal practice to representing accountants, they frequently ask what is going on that they need to be worried about. For small-firm practitioners, my immediate thought is succession planning, but that is not what they”™re really asking me; they want to know about the trouble spots for malpractice lawsuits and threats to their license and livelihood. The question has two distinct parts and the current response is mixed ”” there is some good news and some bad news.
The Good News
We”™ve seen a decline in malpractice claims against accountants. There is no consensus why claims are down, but everyone (except maybe the plaintiffs”™ attorneys) agrees it is a good thing. With no obvious reason for this phenomenon, CPAs should not let their guard down. Managing the risk of being sued for malpractice continues to be a 24/7 obligation.
Client screening and pruning, attention to best practices, proper planning and supervision, ensuring a high level of competence through education and training, communicating with clients and third-parties intelligently and documenting work ”” not just to comply with workpaper requirements but also to build a documented basis to defend advice, exercise of judgment and overall diligence devoted to an engagement, all remain crucial risk management protections that only work if they are implemented and carried out with tireless vigilance.
Although we are seeing that overall claims across all areas of professional service are down, our experience suggests that tax planning and tax compliance are still areas where potential claims are lurking.
Claims arising out of tax services account for the majority of claims against CPAs ”” usually about 60 percent to 70 percent of all claims. Times are still tight for many small businesses, so consequently many accountants are trying to be creative and aggressive for their struggling clients. The results, however, are not always as anticipated, necessitating corrective measures to avoid an aggressive position or a misstep from turning into a difficult claim to defend. Clients rightfully expect that their CPAs will minimize their tax burdens, but steps taken to minimize that burden have to be well thought out, as they will likely have to withstand scrutiny. Some steps cannot be undone easily or at all and the cost to the client, who may look to pass that charge on to the CPA, could be substantial.
Additionally, after nearly 20 years of CPAs telling me the last tax season was the worst one ever, it is hard not to have concerns about preparation errors that are simply mistakes. Since the current environment requires professionals to respond to their clients 24 hours a day, 365 days a year, while also getting the actual work done in between the barrages of email and phone calls, CPAs”™ ability to diligently plan and perform their services is understandably strained. Accordingly, maintaining a manageable workload continues to be a difficult but essential risk management balancing act.
Claims may be down, but the risk of being sued has not gone away. Stay vigilant, my friends.
The Bad News
Disciplinary investigations and proceedings involving CPAs have increased substantially over the last few years and appear to be still on the rise.
For its fiscal year ending Sept. 30, 2014, the Securities and Exchange Commission reported that it had commenced 755 enforcement actions ”” an all-time record. The American Institute of Certified Public Accountants (AICPA) reports that it initiated an average of 630-plus disciplinary proceedings for each of the last three years, with 389 being the most in any prior year.
The Department of Labor has been actively lobbying the AICPA and the National Association of State Boards of Accountancy (NASBA) to scrutinize and investigate the credentials of all CPAs performing audits of employee benefit plans, while other government bodies focusing on not-for-profit entities, charities, educational institutions, health care organizations and many others have been calling not only for greater scrutiny of CPAs, but for new or enhanced disciplinary measures to sanction underperforming CPAs. The result is more disciplinary proceedings against CPAs overall and a substantial increase in the number of disciplinary proceedings resulting from referrals to the AICPA or state boards from government bodies that are responsible for overseeing the CPA”™s client, but have no direct ability to impose sanctions on CPAs.
The disciplinary proceedings initiated as a result of referrals from government oversight bodies are, in some instances, proving more difficult to deal with than those initiated in response to complaints from former clients. The referral generally comes supported with a finding by the government oversight body that the CPA”™s work was deficient and investigators typically defer to those findings. Proving a CPA has fulfilled his or her ethical obligations ”” competence, diligence and adherence to standards ”” can be an uphill battle when a report already has been released that identifies alleged violations as investigative findings. Accordingly, it is often more difficult to achieve a finding of no probable cause in the initial stages of an investigation in these cases.
While it is never a good idea to respond to a disciplinary investigation without consulting a knowledgeable attorney or risk management professional, it is even more important in matters where the investigation has been initiated in response to a referral from a government oversight body. While an inquiry from the AICPA does not put the CPA”™s license in jeopardy, a poor outcome with the AICPA often results in further investigation by the state licensing board, which is not constrained by the findings or sanctions imposed by the AICPA. The CPA”™s plight easily can go from bad to worse in these situations.
All investigative inquiries and disciplinary proceedings present risk, so consulting with a knowledgeable attorney or risk management professional is the best protection against that risk turning into something much worse.
Peter Larkin is a partner in the New York Metro offices of Wilson Elser Moskowitz Edelman & Dicker LLP and co-chairperson of the firm”™s national Accountants practice. He can be reached at 914-872-7847 or peter.larkin@wilsonelser.com.
