New evidence suggests many CPAs are ignoring malpractice risks.
by Kathleen S. Long
Montage Analytics
In 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.”
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. Numerous studies in behavioral science cite 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.
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.
Kathleen S. Long, PhD, is CEO of Montage Analytics, which is rolling out a new method to profile an accounting practice’s culture and susceptibility to operational weaknesses stemming from human behavior.
