CPA Archives - CAMICO

Five Common Missteps in Managing CPA Liability Risk

StyleSite Maintenance — Fri, 17 Apr 2026 10:40:58 +0000

Managing CPA liability risk exposures is a complex process, and it’s easy to underestimate the potential for risk along the way. The following five missteps can be avoided by being aware and taking the right actions.

1. Not discussing questions about the insurance application with your underwriter or agent.

Whether it’s for a new or renewal policy, the better the job you do with the application, the better your chances for avoiding missteps and problems. Take time to review the questions and determine what information and data you will need for it; if you’re unsure about a question or the information being asked, give your agent or underwriter a call to have them explain it to you. State the information accurately. Applications are not opportunities to market or embellish your firm’s profile. Misstatements may result in a higher premium or policy coverage issues if the wrong information is given. CAMICO encourages CPAs to call their underwriters or agents with questions about the application and the information requested. A phone call is an easy way to correct errors before they occur.

2. Not having appropriate policy limits for your firm profile.

Excessively high limits of insurance offered at a bargain prices are red flags. High limits will often put a bigger bullseye on your firm and potentially lengthen the claims process. However, you also need to carry enough limit to be able to protect yourself in the event of a bad claim, or to fight a frivolous claim. A specialized underwriter, agent or account executive can discuss your firm’s specific risk exposures, policy limits, and coverage options. Each accounting practice is unique—tax specialists have exposures that are different from those of auditors. An underwriter or agent experienced in CPA firms will work with you to create a policy that addresses your specific risk areas, with the appropriate limits and cost structure.

3. Admitting liability, assuming damages, voluntarily making any payments, or incurring claims expenses.

These are all actions a CPA firm must avoid without the prior written consent of the insurance company. Such actions will likely violate policy conditions, which may result in a denial of coverage. Policyholders should not take action without first receiving guidance from a risk adviser with the insurance company. Avoid agreements that include “hold harmless” or indemnification provisions that are one sided and not in the firm’s favor. Firms that go along with clients in attempting to handle a problem internally without reporting it are sometimes surprised to find out later that the problem is much larger than it appeared to be. If the problem was not reported timely in accordance with the policy, the damages might not be covered.

4. Not reporting a potential claim as early as possible.

The sooner claims and potential claims are reported, the more effective an insurer can be at achieving an early resolution. Early reporting will also help assure coverage for the potential claim. CAMICO encourages early reporting by reducing the deductible by 50 percent, up to $50,000, for early reporting of a potential claim during the policy period in which it becomes known. Further, if it is determined that it is appropriate to retain legal counsel to assist with a pre-claim situation, CAMICO will absorb the legal expenses, help policyholders achieve a resolution with the client, prepare a tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide subpoena and other services if the need arises.

CPAs are often so busy that they don’t recognize or acknowledge a potential claim as it is developing. This can be particularly devastating when the damages claimed are significant and are not covered because of late reporting. It’s important for CPAs to pay attention to potential issues and to report to their carriers as soon as they think there may be a problem. Also new for CPA firms is CAMICO’s “continuity of coverage for potential claims,” which helps eliminate coverage gaps for potential claims known to an insured and not timely reported by the insured, while coverage is consecutively renewed with CAMICO.

5. Not utilizing the insurance program’s advisory, loss prevention, and risk management services.

The best way to avoid a claim is to manage the risks that lead to claims. Some of the basic risk management tools, such as client screening, engagement letters and follow-up documentation, are crucial in managing potentially major problems into minor problems. The more tools and resources an insurance program provides its policyholders, the better those policyholders will be at avoiding or minimizing problems and disputes. A good insurance program will also advise you on how to utilize its resources to help your firm improve its practices. You can also get a good feel for a company’s service and attitude toward its policyholders by using its services. If you are interested in a good partnership with your company, the company should do its best to help you minimize your losses and control your premiums.

The information provided is a general overview and not intended to be a complete description of all applicable terms and conditions of coverage. Actual coverages and risk management services and resources may vary and are subject to policy provisions as issued. Coverage and risk management services may vary and are provided by CAMICO and/or through its partners and subsidiaries.

The post Five Common Missteps in Managing CPA Liability Risk appeared first on CAMICO.

Key Steps for Tax Risk Management

StyleSite Maintenance — Fri, 17 Apr 2026 10:35:19 +0000

CPA liability exposures during tax season are always a concern. However, liability exposures during this tax season are further exacerbated by the magnitude of recent tax law changes contained in the One Big Beautiful Bill Act signed into law on July 4, 2025. As a reminder, here are some actions that practitioners can take to successfully manage risk exposures.

Defensive documentation is essential to successfully manage risk exposures; practitioners need to be proactive, not reactive, with their written documentation in today’s litigious environment.

CAMICO’s claims experience shows that many high-exposure tax claims have certain characteristics in common, primarily as follows:

• The services for which clients engaged the CPA were unclear.
• The CPA did not clarify his or her role or the client’s expectations, usually because an understanding between the CPA and the client was never reached or adequately documented.
• A lack of clarity and documentation made the CPA’s services difficult to satisfactorily complete.
• Inadequate documentation makes it difficult to defend the CPA in future malpractice actions.

Documentation, or the lack thereof, is always a critical factor in any claim, and the engagement letter is the first line of defense. A well-defined engagement letter clarifies the services that you will render, describes the scope and limit of the engagement, and delineates, in limiting language not only the scope of the engagement, but yours and your client’s responsibilities.

Documenting the understanding between you and the client minimizes the likelihood of litigation, because a well-constructed engagement letter leaves little or no room for misunderstandings which could result in “expectation gaps” — the root cause of many lawsuits. If you do find yourself in the middle of a lawsuit, then the engagement letter will evidence the duties your firm was to perform.

Always try to receive a signature on the engagement letter. Failure to do so may be interpreted by the courts as the client not agreeing to the terms of the engagement. Proceeding with the requested work without a signature could also suggest that you completed the engagement under terms different from those contained in the unsigned engagement letter. In limited situations like lower risk tax engagements, the use of a well-crafted unilateral clause may be appropriate as it establishes actions that if taken, acknowledge the client’s acceptance of the engagement letter’s terms and conditions. Although this type of clause is not quite as compelling as having a client signature, it provides some protection.

Step-by-step guidance through the engagement letter writing process, sample engagement letters, an engagement letter checklist and other tools can be found in the Engagement Letter Resource Center, located on the CAMICO Members-Only Site.

Defensive Documentation

Always follow up on significant client meetings and discussions with defensive documentation. Provide attendees with a synopsis that includes the date, the participants’ names, the matters discussed, the action items and who is responsible for each. Following up significant meetings or discussions with documentation will ensure that you and the other parties are proceeding with the same expectations and assumptions and will provide excellent defensive documentation should someone later allege something else was discussed, they weren’t present, or you were responsible for taking actions you had not agreed to.

Client notifications are a helpful risk management tool to document your communications regarding updates of significance. Jury research shows that the public, including clients, perceive that the CPA’s fundamental job is to “advise and warn” — to advise clients of opportunities and to warn them of risks. The burden on tax practitioners to “advise and warn” is especially important today. The fast pace of change add complexity and challenges to tax compliance. It is important to have written documentation with clients to avoid expectation gaps.

Draft additional engagement letters when necessary. New engagement letters are sometimes needed to avoid engagement creep and/or client-expectation gaps when the additional services require management to acknowledge and accept certain terms and conditions not stipulated previously. When CPAs carefully memorialize an expanding engagement, it is significantly more difficult for clients to hold CPAs responsible for matters outside the scope of the engagement letters.

Informed Consent Letters

In certain situations where there may be different tax alternatives available to the client (for example, estate tax planning) CAMICO encourages the use of “informed consent letters.”

The informed consent letter clarifies what the CPA advises and informs, and the client ultimately decides which action they wish to take. Without such a letter, claimants can allege that the CPA made the decisions on behalf of the client. This type of defensive documentation minimizes potential liability exposures were the client to later assert that your firm is responsible for unexpected events or less than optimal results.

Avoiding Collection Problems

The best way to avoid having a collection problem is to detail your fees, billing and collection policies in your engagement letter. Consider including a fee estimate, noting that unforeseen circumstances or changes in the engagement could necessitate revisions.

Retainers/Deposits: Most ongoing engagements lend themselves to the use of retainers or deposits. These options may be best for clients that are slow paying, financially stressed, or have yet to establish a payment history with you. The engagement letter clause should clearly state that retainers are not an estimate of the total cost of the engagement, do not earn interest, must be paid before work begins, and if depleted, must be replenished before work continues.

Stop-Work/Disengagement Clauses: CAMICO encourages the use of a stop-work/disengagement provision which can be enforced if a client doesn’t pay in accordance with the terms of the engagement letter. The clause stipulates that if the client does not pay the firm, the firm can stop services without incurring any liability to the client for doing so.

The enforcement of this clause significantly reduces the risk that your firm feels compelled to continue incur ever growing fees when the client has yet to pay for prior services. The closer to a deadline this clause is triggered, the greater the exposure to the firm. Don’t wait until right before deadlines or due dates to stop work. Work stoppages close to a deadline increases the likelihood the client will claim you (not they) breached the contract.

Alternative Dispute Resolution: When used appropriately, mediation and arbitration can significantly reduce the cost and the emotional roller-coaster ride of disputes. CAMICO recommends adding clauses to engagement letters calling for mediation to resolve all disputes, and then binding arbitration for fee disputes not resolved during the mediation.

When there is a fee dispute, the firm should inform the client in writing that, unless paid within a specified number of days, the firm will initiate mediation to settle the matter. Using the mediation and arbitration process to settle fee disputes is more effective than litigation, though there is no guarantee that the whole amount owed will be collected. The process itself may prompt some clients to pay some or all the outstanding fees. Filing suit to collect outstanding fees often triggers a countersuit. CAMICO’s claims history indicates binding arbitration to resolve fee disputes is the safer and more effective alternative.
We advise CPAs not to use a general arbitration clause in an engagement letter. Most engagements, when in dispute, tend to produce complex, high-risk, high-dollar disputes that are better managed through litigation than arbitration. An effective legal defense can be restricted and impaired by arbitration.

As always, CAMICO policyholders can call 1.800.652.1772 or email the Loss Prevention department at lp@camico.com for more information or assistance.

The post Key Steps for Tax Risk Management appeared first on CAMICO.

CAMICO Tip: Best Practices When E-filing Tax Returns

StyleSite Maintenance — Fri, 17 Apr 2026 10:29:15 +0000

Q: With most tax returns being e-filed, has CAMICO noticed any trends in e-filings not going through? If so, what advice do you have for policyholders to prevent or address these situations?

A: CAMICO has observed a rise in issues with e-filed tax returns, including processing failures and fraudulent filings. To address these challenges, firms should employ a combination of preventive measures, effective handling of rejected filings, fraud mitigation strategies, and client involvement.

Firms can enhance their internal processes by implementing standardized procedures for all e-filings. Assigning specific personnel to oversee e-filings helps maintain accountability, while requiring a final review of critical details—such as Social Security Numbers (SSNs), Taxpayer Identification Numbers (TINs), and banking information—minimizes errors. Additionally, tracking and logging all e-filings, including submission dates, acceptance statuses, and error messages, is essential to ensuring successful e-filing and helps identify patterns or recurring issues.

When e-filings are rejected, firms should act quickly and systematically. The IRS or state tax authority typically provides a rejection code that explains the reason for the rejection. Staff should be trained to interpret these codes and know how to address the identified errors. Common rejection reasons include incorrect SSNs, mismatched TINs, or discrepancies in prior-year Adjusted Gross Income (AGI). Once the issue is identified, firms should promptly correct the error and resubmit the return. Monitoring resubmissions ensures that the corrected returns are accepted and processed without delay. If rejections occur frequently, firms should assess their internal processes to identify and resolve systemic issues.

If the rejection is due to incorrect information provided by the client, firms should promptly notify the client, request accurate information, make the necessary corrections, and thoroughly document all communications.

If the rejection is due to a fraudulent return, the resolution process is more complex and requires immediate action. Firms should assist clients in contacting the IRS Identity Theft Protection Unit to report the fraudulent filing and may need to guide clients through submitting IRS Form 14039, Identity Theft Affidavit, to formally document the issue. Clients should also be advised to obtain an Identity Protection PIN (IP PIN) to secure future filings. Firms should work with the IRS to ensure the legitimate return is submitted and accepted, providing all necessary documentation to resolve the fraudulent activity. Throughout this process, firms should work with clients and offer guidance on additional measures, such as monitoring their credit, reporting identity theft to the Federal Trade Commission (FTC), and strengthening their data protection practices.

In addition to firms checking the IRS e-Services account for number of returns filed with the firm’s EFIN, clients can also play a vital role in ensuring successful e-filing outcomes. Firms should encourage clients to use the IRS “Where’s My Refund?” tool shortly after filing—typically within a couple of weeks—to confirm that their returns have been accepted and processed.

To help combat fraudulent filings, firms should advise clients to safeguard personal information and beware of phishing scams. Firms can also share resources such as IRS Publication 4524: Security Awareness for Taxpayers and Publication 5423: Identity Theft Information to promote data security. In addition, firms can advise clients that filing early can help reduce the opportunity for fraudsters to exploit their information.

Firms should bolster cybersecurity by training staff to recognize phishing scams and implementing strong passwords, multi-factor authentication, and encryption. Refer to IRS Publication 5293: Protect Your Clients; Protect Yourself for additional guidance. This Data Security Resource Guide for Tax Professionals is intended to provide a basic understanding of minimal steps to protect client data. Strengthening cybersecurity measures is critical to protecting client data and firm systems.

By implementing these strategies, firms can greatly reduce the risks associated with e-filing errors and fraud while effectively managing rejected filings.

The post CAMICO Tip: Best Practices When E-filing Tax Returns appeared first on CAMICO.

CAMICO Tip: Tax Engagements – Managing Client Expectations

Amber — Fri, 09 Jan 2026 15:39:49 +0000

Are you taking the right steps to manage (and document) client expectations? Effective communication is a key factor in any CPA-client relationship, and when you work to stay in control of managing client expectations, you help to safeguard your firm. To that end, good documentation is critical to successfully managing client expectations. Jurors (members of the public) generally consider CPAs to be experts in documentation, and falling short of that expectation may be viewed as negligent and perceived as falling below the standard of care.

Below are helpful documentation tips to get you through the remainder of tax season:

Engagement letters. While engagement letters won’t immunize you from lawsuits, they can be your first line of defense if a client makes a claim against you. Although you likely already have executed engagement letters in place with your tax clients, for those engagements that have had some engagement creep, memorialize the additional services by updating your engagement letter or obtaining a signed addendum clarifying the revised scope and limits.
Always document significant meetings and communications. Follow up with written communications in circumstances including, but not limited to:
- Change in engagement scope (may require a new engagement letter)
- Negative information (e.g., tax return is already late, client’s failure to timely provide information, client is facing an audit)
- Judgment calls (e.g., aggressive tax positions taken by your predecessor)
- Client agreement to take significant action
- Conversations regarding transactions, extensions, or estimated tax payments
“Advise” clients of opportunities and “warn” clients about risks. Consider the need for additional documentation (e.g., client notification letters, tax representation letters, etc.) to mitigate high-risk issues such as the following:
- Recent legal and regulatory developments regarding the Beneficial Ownership Information (BOI) reporting requirements under the Corporate Transparency Act (CTA) have implications for reporting companies’ compliance obligations and FinCEN’s enforcement of the CTA reporting rules as currently promulgated. As the CTA-BOI saga continues, CAMICO strongly recommends that CPA firms continue to keep clients informed and advised as these significant developments occur.
- For clients with significant digital asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement addressing cryptoasset implications. The additional defensive documentation provides evidence of the client’s understanding and acceptance of their responsibilities regarding digital asset transactions and the limitations of the services your firm provided.
Written documentation should be factual, professional, and without personal commentary or unsubstantiated opinions. Unprofessional and/or inappropriate comments can damage the integrity of documentation. Ask yourself whether your documentation would be helpful or harmful if presented at trial.

The post CAMICO Tip: Tax Engagements – Managing Client Expectations appeared first on CAMICO.

Navigating Change, Client Expectations, and Professional Risk Under the OBBB Act

Amber — Thu, 13 Nov 2025 18:01:41 +0000

The recently enacted One Big Beautiful Bill Act (“OBBB Act”) ushers in some of the most significant tax law changes since the Tax Cuts and Jobs Act. While many provisions are designed to simplify or stimulate economic activity, they also create traps for the unwary. CPAs need to remain alert to compliance challenges, client misperceptions, and liability exposures as the IRS and state taxing authorities continue to issue implementing guidance.

As professionals who help CPA firms manage risk, we recognize that major tax legislation is a leading source of malpractice claims. The OBBB Act introduces both planning opportunities and new stress points that can easily evolve into disputes if expectations are not clearly communicated and documented. Although not meant to be all-inclusive, this article highlights several current risk areas and practical strategies for managing them through communication, documentation, and engagement-scope clarity.

Depreciation and Expensing Provisions — The Timing and Documentation Trap

The restoration of 100% bonus depreciation for property placed in service after January 19, 2025, and the increased Section 179 expensing limit to $2.5 million (with a $4 million phase-out threshold) are welcome, but the effective dates create traps for accurate application.

Determining when an asset was “acquired” — based on the binding contract date — remains one of the most frequent sources of bonus depreciation errors. This rule, unchanged under the OBBB Act, still governs when property qualifies as newly acquired for purposes of the 100% deduction. Eligibility depends on both when the asset is placed in service and when the binding purchase contract was executed. Property acquired under a contract signed before January 20, 2025, is treated as acquired under prior law and may qualify only for the reduced bonus percentages in effect at that time.

From a best-practices perspective, practitioners should obtain and retain supporting documentation — such as contracts, invoices, or purchase orders — confirming both the contract date and the placed-in-service date to avoid potential risks associated with timing errors. The IRS enforces these transitional rules strictly, and missteps can easily lead to audit adjustments and potential professional liability.

Taxpayers who benefit from increased bonus depreciation and Section 179 expensing may assume those tax benefits will continue in future years, even though these provisions are temporary. Without proactive communication, clients may be unprepared for the higher tax liabilities that will follow once the provisions sunset after 2028 and normal depreciation patterns resume. This misunderstanding can create frustration or even allegations of poor planning. CPAs should confirm in writing how clients intend to time asset purchases, emphasize that these accelerated deductions are temporary, and remind them of state conformity differences that may sharply limit the benefit. Engagement letters and planning correspondence should frame projections as estimates subject to change. Clear, written communication — supported by signed client acknowledgments — remains the best safeguard for managing expectations.

Research and Development Costs — The Retroactive Burden

The Act restores immediate expensing of domestic Section 174 R&D costs for tax years beginning after 2024 while foreign research must continue to be amortized. This makes it important to distinguish domestic from foreign research activities; misallocating these costs can result in material errors, particularly where research is spread across multiple locations or functions.

For many taxpayers, the shift back to immediate expensing of domestic R&D will require an Accounting Method Change, filed on Form 3115, along with a Section 481(a) adjustment to reconcile prior-year treatment. Errors in Form 3115 preparation are a frequent audit trigger and often lead to broader examinations. To help manage this exposure, firms should treat the preparation of Form 3115 as a separate engagement — identified in the engagement letter with its own scope, timeline, and fee structure — rather than incorporating it into standard tax return preparation.

The Act also permits taxpayers to amend prior-year returns (2022–2024) to retroactively expense domestic R&D costs. While doing so may produce refunds, it also introduces the audit-risk-of-amendment — the risk that filing the claim opens the entire return to IRS review, not only the R&D adjustment. In other words, while the refund may be justified, amending a return effectively invites the IRS to take another look at every item reported on that return. Practitioners should document discussions weighing the potential benefit of the refund against the increased examination risk. Written client acknowledgment is particularly important where the refund amount is relatively small compared to the cost and risk of an IRS examination, where prior-year documentation may be incomplete or uncertain, or where the taxpayer has other positions on the return that could draw scrutiny. In these situations, obtaining a signed acknowledgment helps ensure the client understands both the benefit and the associated exposure before choosing to proceed.

Business Interest Expense, QSBS, and Opportunity Zones

The easing of Section 163(j) limitations through EBITDA-based calculations expands deductibility, but risk remains where intercompany debt allocations, thin capitalization, or aggressive financing structures exist. CPAs should limit their role to tax compliance and planning guidance and refer clients to legal counsel or other advisors for any questions involving the terms of financing arrangements or the structure of the underlying debt.

Both Qualified Small Business Stock (QSBS) and Opportunity Zone provisions received extensions and modifications, including expanded exclusion limits. These remain complex and closely scrutinized. Practitioners should refrain from offering definitive advice until the IRS and Treasury issue regulations. Any interim planning guidance should be accompanied by written disclaimers clarifying that the advice is preliminary and subject to change.

Energy Credits — A Renewed Source of Risk

The OBBB Act modifies and consolidates several energy-related credits, including provisions affecting solar investments, electric vehicles, and energy-efficient property. As with prior legislation, these areas are frequently associated with aggressive marketing claims, promoter involvement, and inflated valuation assumptions. CPAs should not endorse or recommend specific investment programs and should document all client communications regarding energy-credit eligibility and substantiation.

When assisting clients with credit calculations or filings, engagement letters should clearly limit the firm’s role to compliance — based on client-provided documentation — and disavow responsibility for the underlying economic or legal validity of these investments.

Individual Provisions — The 2029 “Tax Cliff” and Temporary Deductions

For tax years 2025 through 2028, taxpayers may claim new temporary deductions: up to $25,000 for tips, $25,000 for overtime pay (joint filers), and $10,000 for car loan interest on new U.S.-assembled vehicles. The SALT deduction cap also increases to $40,000 through 2029.

These benefits create a significant “tax cliff” beginning in 2029, when they expire and the SALT cap reverts to $10,000. CPAs should incorporate these reversions into projections to prepare clients for higher future liabilities and avoid allegations of poor planning.

The 20% Qualified Business Income (QBI) deduction is now permanent, but eligibility — particularly for specified service trades — must still be tested carefully. Documenting the assumptions used in determining QBI eligibility is a key risk-management safeguard.

Compliance, Credits, and Penalties

The Act increases due diligence obligations across multiple credits and deductions. Some examples include:

Ongoing Employee Retention Credit (ERC) scrutiny reinforces the need for separate, detailed engagement letters and client representation letters confirming eligibility. CPAs must not assume responsibility for verifying eligibility — this distinction is central to malpractice prevention.

For self-employed clients, the Form 1099-K reporting threshold increases to $20,000 and 200 transactions. This change can heighten the potential risk of income understatement and reinforces the best practice to issue engagement letters and clarify the clients’ responsibility to provide complete and accurate information for preparation of their tax returns.

The Act also makes the Alternative Minimum Tax (AMT) exemption permanent but reintroduces phase-outs beginning in 2026 and expands Disaster Relief provisions to cover certain state-declared events. Practitioners should confirm eligibility, secure documentation, and avoid filing claims prematurely.

Practical Loss Prevention Takeaways

The OBBB Act is a complex mix of permanent, temporary, and transitional provisions. Effective risk management depends on communication, documentation, and clear scope definition.

Communicate early and often. If engaged to do so, model estimated impacts and emphasize that all projections are subject to change as guidance evolves.
Obtain written authorization. Confirm elections and timing decisions — especially for depreciation, R&D, and energy credits — in writing.
Clarify your role. CAMICO recommends that your tax engagement letters specifically detail the scope and limits of the engagement, which should define the firm’s services as limited to tax compliance and planning (if applicable).
Document thoroughly. Maintain comprehensive workpapers, including if applicable eligibility analyses, and client representation letters for all high-risk positions.
Monitor developments. Stay current on IRS and Treasury guidance. If appropriate, inform clients when prior advice may need to be revisited.

Final Word

The OBBB Act presents both opportunity and exposure. By staying proactive — communicating clearly, confirming assumptions, and documenting diligently — tax practitioners can help clients benefit from new provisions while minimizing professional risk. Large, accelerated deductions and temporary relief should be clearly communicated as timing benefits rather than permanent tax reductions. Clear communication, sound planning, and thorough documentation remain a tax practitioner’s strongest defense.

CAMICO policyholders with questions regarding this article or other risk management topics should contact the Loss Prevention department at lp@camico.com, or call our advice hotline at 1.800.652.1772 and ask to speak with a Loss Prevention Specialist.

The post Navigating Change, Client Expectations, and Professional Risk Under the OBBB Act appeared first on CAMICO.

How Your Story Will Be Told to a Jury

ssAdmin — Wed, 05 Nov 2025 20:16:18 +0000

By Ron Klein, J.D.

Among its many roles, CAMICO acts as a gathering and disseminating agent for CPA liability experiences across the nation. For nearly 40 years, we have gathered hundreds of thousands of CPA experiences and distilled the learnings those experiences provided so that we could tell CPAs about the real-world risk implications to their firms.

A perspective that is important for CPAs to reflect on is how their actions – for which they are getting sued – will be portrayed to the jury. The gap between the experienced reality and the story told at trial can be significant and is illustrative of what CPAs need to do today to minimize risk tomorrow.

When looking at a situation in hindsight, it is important to note that history can sometimes be “rewritten” to benefit the client: “Why didn’t my CPA warn me about what was going to happen? I was relying on my CPA’s expertise for financial help.” The good news, however, is that CAMICO’s vast experience and research help to inform us as to what factors and preconceived notions sway jurors. As such, the advice and guidance you will find in this article are designed to raise your awareness and help you to recognize (before the “milk is spilled” and a claim occurs) what the triggers are that may sway jurors, as well as proactive risk management steps you can take to improve your chances of having history favorably rewritten with a jury to your benefit.

For example, let’s take a “garden variety” embezzlement claim. As the CPA experiences it, it goes something like this:

For the past six years, the CPA has been providing tax preparation services as well as occasional assistance to the sole accounting employee, including closing the books at the end of the year. During this period, the CPA meets face-to-face with the client/owner less than a dozen times, visits the client’s office another dozen times, and communicates by email and phone several times a month, usually with accounting. While helping to close the books at the end of year six, the CPA finds a number of vendor payments in a suspense account. When the CPA asks the owner about the payments, the owner does not recognize any of the vendors. And the embezzlement quickly unravels. It turns out that the accounting employee had embezzled over $275,000 over the past ten years, having begun four years before the CPA even obtained the client.

After a few years of litigation, including over 700 written interrogatories, 80 hours of depositions and 90,000 documents, the attorneys on both sides now have a better understanding of what occurred than any of the participants, including the CPA. What does the jury hear? Given the necessary compaction of time, each attorney, for the plaintiff and the defendant, will focus their cases. Each of them will select four or five key documents and some testimony each feel is particularly impactful (usually from an expert and one or two eyewitnesses). The jury will have no sense of the actual expectations of the client/plaintiff before the discovery of the embezzlement. Juries most often place little weight on the professional standards that guided the CPA.

From the testimony, evidence and argument, each juror will decide. From jury research and many previous embezzlement claims, CAMICO knows that juries will likely decide based upon:

Whether the jury believes the CPA “warned the client of risk and advised the client of opportunity” in financial and tax matters. In embezzlement cases, this burden is increased because juries believe CPAs are the fraud police and embezzlements are common. Most juries believe that the CPA’s “advising and warning” antennae should be hyper-sensitive during difficult economic periods. Some even believe “anyone can do a CPA’s job when times are good, but when we really need the CPA — that’s when the CPA should really be tuned in.” In other words, expectations are elevated when economic times are challenging.
Written documentation (“in plain English and not legalese-speak”) to support the scope and limits of the services the client engaged the CPA to render. It is ideal to have a signed engagement letter that is current and specifically mentions that the services contracted for are not designed to detect fraud. Second, a written communication informing the small business client of embezzlement risk, which needs to include ways the client can manage embezzlement risk, including the importance of timely bank reconciliations, requiring substantiation for each check, and monthly review of the bank statement by the owner. This written communication allows the CPA’s attorney to make the argument that the CPA warned the client of the risk of embezzlement and advised the client of actions to take that will reduce the risk to client. With the good evidence described above, the CPA attorney will be able to turn the tables on the client, forcing the jury to consider whether the client met his obligations to protect himself. The best offense is a good defense.

Is it necessary to have the engagement letter signed and current, and the communications in writing? Absolutely. Jurors do not like to rely upon verbal communications. Verbal communications are always disputed. Further, the jury expects the party with the power and knowledge (CPA) to have the burden of documentation. This is especially true of CPAs because juries view CPAs’ job as documenting everything significant.

What happens at trial if the CPA did not fully meet the expectations of the jury to warn and advise? Without a good written warning communication about small business risks of embezzlement, instead of the CPA’s attorney arguing that the CPA warned about embezzlement risk and that the client failed to do what was necessary, the client’s attorney will argue that the CPA left the financially unsophisticated client unaware of the risk and unprepared to deal with it. It is not unusual for clients who signed blank checks (for convenience) to argue that their CPA never advised them not to sign blank checks. Thus, rather than the jury’s focus being on how well the CPA warned the client and whether the client took appropriate defensive action, their attention is turned to how and how often the CPA had a chance to catch the embezzlement but failed.

Did the CPA know that bank reconciliations were months behind, or how vendor payments were processed at the client’s office? A jury’s expectations are that the CPA, after six years of service to the client, will have a profound knowledge of how the business works, even with limited services. The CPA’s duty expands with time, in the jury’s mind.

Just as it is the CPA’s job to inform the client of embezzlement risk, it is CAMICO’s job to inform the CPA of embezzlement risk as well. So, it is highly recommended that you consider our guidance, especially for small businesses:

Have a signed and current engagement letter that specifically addresses embezzlement and fraud, and warns that the services requested are not designed to detect them.
Send an initial written warning letter informing the client about embezzlement risk, the appropriate way to process payments, bank reconciliations, and monthly review of the bank statements and checks by the owner.
Be aware of the importance of timely bank reconciliations. If the client is more than two months behind with bank recs, that is an embezzlement alert, likely requiring at least a written communication with the client.

A struggling economy exacerbates the potential for embezzlement claims, as many businesses and individuals are under growing financial strain. Increased financial need will likely increase pressure and rationalization for fraudulent behavior (e.g., “My line of credit has been canceled.” “My retirement funds shrank.” “I need this money.”) Understanding the gravity of these pressures is crucial to effective fraud prevention and detection. Public perception is that CPAs are expected to have a “nose for fraud,” regardless of the limitations of the engagement. The expectation that CPAs will detect fraud is extremely difficult to meet, but the expectation to advise and warn is much less difficult. By advising and warning clients of their fraud/defalcation exposures and responsibilities, CPAs can minimize liability stemming from the expectation CPAs will detect fraud.

The best thing about our recommendations above is that, if followed, not only will they provide you with the best defense should you get sued, but there is also a very good chance that they will prevent or discover embezzlements. In which case, that will make the CPA a hero to the client rather than a target – the best win-win of all.

Ron Klein, J.D., is Risk Management Counsel with CAMICO. He has been with CAMICO since its inception in 1986 and managed the claims department for 25 years.

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