Avoiding Liability

Source: Practical Accountant

Highlights from advice given by liability insurance firms:

• Claims for the firm’s neglect to advise clients on tax opportunities can be avoided by documented discussions of the scope of the engagement.
• Avoid “engagement creep,” the rendering of tax planning advice not requested.
• Firms are vulnerable on inventory value and accounts receivable. On the latter, make sure the confirmation process is strictly controlled by the auditor, e.g., communicating directly with the debtors.
• Be aware of what is important to third parties.
• Do not get too complacent about the idea that financial statements are the responsibility of management.
• Adopt a rigorous client acceptance process including background checks on executives and directors. Be suspect of clients in financial trouble and companies that frequently change accounting firms.
• Partner compensation too closely tied to new business can be dangerous.
• If you are involved in financial planning, make sure it is covered by your liability insurance policy.
• Many claims develop from litigation services, often against firms that provide litigation services only occasionally, when requested by a client.
• Use effective engagement letters for all engagements. See previous articles in CPA Leadership Report:
  • Trends in Engagement Letters January 2007
  • Engagement Letters—When the Client Won't Sign April 2007
  • Preparing Engagement Letters December 2007
  • Engagement Letter—A Positive Factor in Client Communication December 2007
• Document everything and send memos confirming content of discussions in person or over the phone.
• Avoid using terms such as “exceeding your expectations.”
• Disclosure of conflicts of interest do not always protect you. In representing dissolutions of businesses or marriages, one party may believe the CPA has favored the other.
• Investing in a client business may serve to attract other investors and increase the CPA’s exposure.
• Referrals can cause problems if there is a perception that the CPA received financial benefit from it.

More details are provided in the article, including information on seminars, publications, self-study courses, newsletters, consultations, etc.

For the complete article, click here and select Tips from Professional Liability Insurers.

From Practical Accountant, February 2008, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY 10004, 800-221-1809.

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