1) Trusting a client too muchA long-time client asked her CPA to perform an audit for a new insurance company she's invested in. The CPA uncovered unverifiable assets but never verified them. Still, under pressure from the client and an impending deadline, the CPA issued a report after some creative financing confirmed the assets. The assets turned out to have been a scam, and the firm was sued by the state insurance board.
2) When a client botches a real estate transactionA busy restaurateur trying to execute a 1031 exchange accidentally accepted cash from the transaction rather than having it put in escrow—generating a tax bill of nearly $1 million. Even though the CPA repeatedly advised him to use an intermediary, a jury found that the CPA's advice wasn't clear enough, and awarded the restaurateur $250,000.
3) Waiting until the morning to encrypt client dataA CPA came home from a client engagement, dropped off his laptop there, and went to dinner with his wife. Burglars broke in and stole his laptop—which held personal information for every employee of a huge grocery conglomerate.
4) Giving advice to both sides during a divorceA CPA helped a divorcing couple value and divide their two businesses. When the wife's business languished, and the husband's business grew quickly, she sued, claiming that the CPA had consciously favored the husband.
5) Working for a client even though they haven’t paidA CPA firm performed a fraud audit for a struggling corporation that already owed the firm $65,000. When the firm found further problems, it restated the company's earnings, causing a near-bankruptcy. The company owner sued, claiming the firm should have found the fraud in the first place. The firm endured a long lawsuit, and though exonerated, was never paid for their work.
6) When a client steals letterheadYes, this happened to a CAMICO policyholder. Two business partners tried to fund their retirement by defrauding their own company. To apply for a line of credit, they distracted the CPA's secretary, stole the letterhead, and forged a financial statement on it.
7) Recommending an investment that doesn't work outA CPA who liked to play the stock market sometimes gave tips to a college friend who also happened to be a client. The friend took a large position in one stock the CPA recommended. It collapsed, and the “friend” sued.
8) Recommending an investment that turns out to be a fraudA client with a large chunk of taxable income took her CPA's advice to look for a real estate investment that could generate passive losses and reduce her tax bill. She found an investment and sent the sales materials to the CPA. His surface-level review didn't catch anything. But two years later, an IRS investigation reversed the client's tax savings. She sued the investment company and her CPA.
9) Recommending an investment advisor who recommended a Ponzi schemeA CPA recommended a well-known investment advisor to a long-time client. The advisor recommended what turned out to be a Madoff-style Ponzi scheme. When the scheme collapsed, both the advisor and CPA were sued.
10) Giving in to client pressureAn appliance dealer and long-time client asked his CPA for a verification letter to get a loan. The CPA balked, since he'd never verified his client's business financials, relying only on the numbers he was given. But when the client threatened to pull his business, the CPA caved in. Turned out the appliance business was in trouble. The client defaulted on the loan, and the bank sued the CPA for negligent misrepresentation.
11) Recommending against an aggressive tax strategy … but a client does it anywayTwo retiring businessmen wanted to transfer their company to family members. Their lawyer came up with a plan he thought would keep taxes low. Their CPA advised against it—he thought the plan was too risky, but he went along with the plan anyway. When the IRS did indeed impose penalties, the client's new lawyer sued the CPA for malpractice.
12) Helping a client who’s on a deadlineWith time running out to do a 1031 exchange, a CPA helped a frantic client assess three commercial property options. Three years later, the building the CPA recommended was nearly vacant—the area has become overbuilt. Facing foreclosure, the client sued.
13) When a client repeatedly ignores adviceYear after year, a non-profit's CPA did financial reviews for the organization—but recommended that they pay for audited financial statements. The non-profit's board thought audits would cost too much. When the CPA found evidence of fraud, he was the one who was sued—the organization thought his reviews should have caught the problem.
14) Trying to protect a wealthy, well-connected family friend who's having business troubleA San Francisco accounting firm with wealthy Nob Hill clients tried to help a longtime friend avoid bad publicity by trying to keep the lid on the fact that he'd faked transactions for his investment company. When the truth came out, hundreds of third-party investors sued.
15) When the bookkeeper embezzlesA grocery store owner asked his CPA for tips on keeping better accounting internal controls. The CPA suggested verifying the vendor names on all cancelled checks. When the owner discovered that one of the vendors was a company owned by his bookkeeper—who'd stolen $96,000 over two years—he sued the bookkeeper...and the CPA! The owner claimed the CPA should have recommended checking vendors earlier. The CAMICO claims files are stuffed with small business embezzlements. When a bookkeeper embezzles, it's often the CPA who ends up being named in a lawsuit.
16) Doing side business deals with clientsA CPA firm knew two of its long-time clients wanted to invest in real estate, so they all teamed up to buy an office building. When the building's biggest tenant went bankrupt, so did the partnership. The clients sued the firm for fraud, conflict of interest, and negligent investment advice.
17) When a client's a huge risk-takerA CPA's new client was a serial entrepreneur trying to corner a Chinese shipping market. When shipment sales were low, he convinced employees to create fake ones. When the CPAs uncovered the scheme, the client sued them! The case went on for two years, legal fees topped $160,000—and the CPAs "won," but were never paid.
18) Following a lawyer’s advice without checking the tax implicationsA husband's will stated that his assets were to go to his wife when he died. Upon his death, following their lawyer's instructions, the couple's CPA made the transfer. But establishing a trust for the wife could have saved the family hundreds of thousands of dollars in taxes. They sued.
19) When machines break downA CPA provided income projections to a client buying a dry-cleaning business. After the sale, the dry-cleaning machines began to break down. The client sued, claiming that the projections constituted a valuation, which shouldn't have been done without inspecting the machines.
20) When a client forges financial statementsOwners of a California department store used a CPA's financial statement to get loans year after year by doctoring it and passing it off as original. The CPA wondered why banks didn't contact him, but since the client was lucrative and the business seemed to be growing, he didn't want to ask too many questions. The growth was a mirage, the expansion untenable. With their business hemorrhaging cash, the owners took what was left and fled the country. The banks, with nowhere to turn to recoup their losses, sued the CPA.
21) Outsourcing financial planning services and not keeping proper documentationA CPA decided that personal financial planning work was putting too big a burden on his firm, so he outsourced it. Busy associates and the subcontractors' salespeople both gave advice to the firm's clients. Out of the blue, a client sued, claiming the firm's advice caused him a $1 million stock loss. A busy associate recalled a conversation but didn't document any specific advice, warnings or caveats.
22) Keeping a new client despite finding mysteries with their financesA CPA with a new client noticed lots of wire transfers between the client's businesses. Even though he never got a good explanation, he continued working for them. Turns out the transfers were covering up a Ponzi scheme. When it was discovered, the CPA was sued.
23) Mixing business expenses with trust expensesA CPA managed both a business and a family trust set up by the owners of the business. Seeing opportunities to grow the business, he used money from the trust to fund investments. When some of those investments went bad, the trust was short of money. The trust recipient sued.
24) Recommending that a client not go for a tax credit because they’re disorganizedA CPA with a difficult, disorganized corporate client knew the corporation would qualify for a tax credit, but also knew they'd never get the information to him on time. So he recommended that they not try for it. A few years later, after a new CPA came on board, the company sued the original CPA for the $520,000 in tax credits they could have received.
25) Offering extra services without the requisite expertiseA CPA firm with three years of experience in computer consulting asked an associate with good knowledge of desktop computers to manage a project involving much more powerful machines. His recommended hardware and software combo were a bad fit; some sales transactions weren't recorded correctly. With improper recordkeeping hurting their business, the client sued for $300,000.
26) Taking on a client in a new industryA big real estate client landed in a CPA's lap. The CPA hadn't worked much with real estate investors. But, despite warning signs such as poor communication and a pending lawsuit against a prior CPA firm, the money was too tempting to resist. When a landslide caused a deal to go bad, the developer was sued—and an investigation revealed that the CPA's financial statements were inadequate.
27) When a client unwisely cuts services from audit to reviewA company decided to cut costs by reducing their services from audits to reviews. A CPA working on the account found discrepancies, but didn't follow up—since that would be an audit function rather than a review. The controller took advantage of the lower level of supervision to falsify payroll statements. A jury found the CPA firm negligent and assessed damages of $1.2 million.
28) Quitting a client that was providing false informationA CPA refused to issue an audit report for a limited liability partnership after company management supplied him with falsified documentation. But the CPA didn't tell anyone. When the SEC uncovered fraud, investors sued the CPA.
29) Recommending a two-person bookkeeping system to a client who is victimizedA CPA recommended to a vintage clothing store owner that she have two people share bookkeeping responsibilities. But then the owner laid one of them off. The remaining employee falsified checks, stealing more than $100,000 in 30 months. The owner turned around and sued the CPA, claiming he should have caught the fraud.
30) Helping a client hire someoneA computer software company asked their CPA to assess the qualifications of the man they planned to hire as controller. The CPA signed off on the controller's credentials, and continued to perform monthly write-ups for the firm. The controller ended up embezzling more than $200,000. The CPA was found negligent for not performing a background check on him.
31) Natural disasterFor years, a CPA recommended to owners of a natural vitamins company that they convert from C-Corp to an S-Corp. The client declined. Ten years later, the owners realized their mistake and sued their CPA. But, in the meantime, a landmark flood destroyed all of the CPA’s records. Without documentation, he couldn’t prove his side of the story. The lawsuit asked for damages of nearly $1 million.
A lawsuit that damages your reputation and your finances is like a natural disaster—it can strike at any time. CAMICO helps protect CPAs from catastrophe.