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Economic Downturns Exacerbate Liability Claims

Economic conditions have historically had a significant impact on CPA professional liability claims. In general, more claims and larger claims are filed during a downturn. The recession of 2008–09 was no exception. Public expectations and standards for the CPA profession (as opposed to CPA professional standards, or the profession’s standards for itself) again became a focal point, and clients asserted their expectation that CPAs should advise and warn clients of all risks and opportunities. When something goes wrong with their businesses, some clients will perceive the CPA as having failed to advise and warn about whatever went wrong. Hindsight also leads some clients, and their attorneys, to ask why the CPA did not send written warnings about potential losses.

Long-Term Lessons

What CAMICO has learned since its founding in 1986 has been repeated over and over. As the economy goes, so goes CPA risk exposures. When a positive economy is building, CPA claims are lower. But claims are also gestating, waiting for their moment to be born. Economic upswings tend to cause unbridled enthusiasm, which leads to unwise speculation. When the economy eventually sours, unwise speculation turns into losses, and investors and creditors, especially banks, look for scapegoats. What better scapegoat than the CPA who advised the client to invest, or who ‘validated’ the investment?

Over the years, CAMICO has provided guidance on the steps CPAs can take to address economic exposures, including the following:

  • Identifying and educating clients at high risk;
  • Educating staff members who interact with clients;
  • Heightening professional skepticism;
  • Increasing scope, intensity, and fees for attest work;
  • Insisting on current valuations;
  • Identifying and understanding investment risk;
  • Being attentive to disclosure of loan covenant violations;
  • Examining risk to third parties;
  • Risk-screening new and existing clients;
  • Documenting the firm’s understanding with the client in an engagement letter; and
  • Documenting all advice, warnings, and decisions.

The fundamental principles of risk management for CPAs have remained remarkably constant over the years, despite the variety and complexity of changes that have taken place in regulatory and professional standards for CPAs. This constancy is mainly due to the high expectations the public has for CPAs—expectations that affect the way CPAs are perceived in the world of professional liability, where CPAs are judged by jurors, judges, and arbitrators who generally have a limited understanding about what CPAs do. Judgments and verdicts rendered in liability disputes then create what are sometimes referred to as jury or claims standards, which have almost always been higher than the standards the profession has established for itself. CPAs who pay proper attention to their professional liability exposures gear their risk management techniques not only to what the profession expects of them, but also to what the public expects of them.

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