Even when covered by insurance, claims can have a significant impact on your practice in terms of time, money, professional reputation, and peace of mind. By knowing the warning signs of a claim, and calling your risk advisor early on, you can help minimize the impact of lost billable hours, revenue and sleep. What are the red flags? Here are five general warning signs that trouble may be brewing.
Number 1 – Clients who don’t pay
Clients can develop grudges, complain, or withhold payment of fees for a variety of reasons, usually because they don’t have the money, or they are unhappy about the results of the services and are using the fees as an informal “offset” to their perceived damages. Both of these are also good reasons not to sue for fees.
Number 2 – Clients with poor bookkeeping and accounting skills
These are the clients that always need more of your help, which leads to ‘engagement creep’. Poor bookkeeping can cause delays in obtaining information, resulting in the CPA’s work product to be out of date and useless to the client. Tax returns might be filed late, causing the client to incur interest or penalties. Poor bookkeeping may also require the CPA to work harder to get a handle on financial information, and increased workloads lead to higher fees, which can lead to conflict. All of these situations can lead the client to blame the CPA. The more involved you are in a client’s day-to-day accounting, the more vulnerable you are to a claim when the business fails or experiences financial setbacks.
Number 3 – Clients with poor internal controls
Obtain a good understanding of the client’s commitment to appropriate accounting practices and internal controls. Clients with poor internal controls are embezzlements waiting to happen, or embezzlements already happening and nobody knows yet, except for the embezzler. These are the clients that usually ignore your advice to clean up internal controls. They will then blame the CPA for not catching the embezzler. CAMICO recommends that any kind of advice about internal control issues be put in a letter to the client. The letter can be used later as documentation if a claim is made. Be aware that this is a high exposure area not just for audits and reviews but for tax return preparation and compilations.
Number 4 – Clients experiencing poor financial performance
When a business fails, the client wants to blame anybody but themselves – and usually the client will target the CPA. In addition, you have to be concerned about investors or lenders who will be looking for money they lost in the client’s business – and they will look to the CPA’s insurance policy for that money.
Number 5 – Subpoenas
Divulging confidential information to a third party without certain safeguards (such as client consent, a subpoena, or a search warrant) is prohibited by the rules of the CPA profession, the Internal Revenue Service, and state boards of accountancy. If the subpoena is invalid for a technical reason, complying with it may put the CPA at risk of ethical or regulatory violations. Be sure you are getting proper advice about whether and how you should respond to a subpoena. The best rule to follow is to always seek legal guidance from your risk advisor or attorney before responding to any such requests.