Top Five Ways to Get Sued

Camico, the California-based malpractice insurer, describes five ways CPA firms can increase their exposure to lawsuits and what preventative measures to take.

Highlights:

1. Accounting rules: While accounting rules don’t require certain procedures, e.g., confirmation of information in a compilation engagement, juries may not take that rule into consideration. So if something doesn’t seem right to you, it is best to do some probing and make sure it is right. Then be sure to document it and communicate it.

2. Documentation: If you advise a client to take certain steps, or to avoid certain actions, put it in writing and send it to the client. Juries may conclude that if the advice was not written, it was not given.

3. Partnering with clients: Investing in client ventures can backfire. If the venture sours, juries may believe the CPA did not act in the client’s best interest. Disclosure of the conflict of interest may not help, especially if the client’s acknowledgment was given without the advice of its attorney. And be sure to check with your insurance company to see if its policy excludes losses on these kinds of ventures.

4. Advising both sides of dispute: Avoid doing this. One side may assert that the CPA favored the other.

5. Suing to collect fees: This often precipitates a countersuit by the client. And your insurance policy might not cover it.

Source: Camico via CPA Leadership Institute.

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Posted at February 6, 2010
Filed Under BSG [CPA TRENDLINES] | 2 Comments

Comments

2 Responses to “Top Five Ways to Get Sued”

  1. Kathleen S. Long, PhD on July 2nd, 2010 2:27 pm

    Rick,

    I read your article, the Top Five Ways to Get Sued, with great interest and applaud your efforts to encourage CPAs to think proactively about practice risk. In our research on causes underlying accountant professional liability, we are discovering an alarming phenomenon: practice risk apathy.

    We are finding that a statistically greater than expected number of CPAs are apathetic to practice risk management. Early results indicate that while CPAs gobble up “war stories” and “top ten lists” about risk management, getting them to examine their own practices and make risk management an action item is a different matter altogether.

    What we are hearing from CPAs is

    1) “We are insured, so we’re covered”.

    2) “We care about risk, but don’t think our firm is vulnerable”, and

    3) “Given our current priorities, internal risk management is interesting, but not an immediate need, so it’s not on our radar.”

    We are finding a surprising number of CPA practices underestimate their own risk while overestimating their capabilities to manage it. Because so many CPAs seem to believe that “risk happens” – to others, they have difficulty substantiating the benefits of systematic risk management for their own practices. As a behavioral scientist, I have read numerous studies citing the inverse relationship to proximity and perceived risk and see some relevance to this situation.

    It seems that when individuals perceive risk, but have vested economic, social and emotional reasons to stay where they are, they tend to underestimate their vulnerability to harm. For example one study revealed that 61% of residents in a flood plain did not, against evidence to the contrary; perceive they lived in a hazardous area. Similar studies include people living in homes seeping radon, and those living next to a nuclear reactor. This phenomenon is sometimes referred to as the “Psychological Typhoon Eye” which refers to the region of calm weather at the center of a strong storm. Although these examples describe physical risks, the typhoon eye dynamic has implications for CPA s who have a vested interest in remaining in a satisfying practice and cope by transferring risk to insurance and remaining apathetic to the threats to their practice that no amount of insurance can cover: damaged business relationships, loss of reputation, lost billable hours managing disputes and stress.

    Although your readers may be more sophisticated and proactive than others in the profession, given the 40,000 CPA practices in the US, this apathy is a ticking time bomb. Until CPAs see personal relevance, take an informed look at their own risk, and make risk mitigation and management a priority – the time bomb is ticking. Tick, tick, tick.

  2. Gary E. Jones, CPA on July 5th, 2010 2:01 pm

    Some other reasons we hear frequently are:

    1. We are not concerned about practice risk management unless there is a direct path to reducing our E&O insurance premium, and

    2. We would engage more with our insurance provider on risk management, but are concerned that it would have possible adverse consequences.

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