Lawsuits Archives - 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.

The post How Your Story Will Be Told to a Jury appeared first on CAMICO.

How to Respond to Subpoenas

ssAdmin — Tue, 10 Jun 2025 21:13:45 +0000

CPA firms are often uncertain about whether or how to respond to a subpoena, as they also need to comply with a number of rules and regulations that are intended to protect client confidentiality. The following Q&A focuses on understanding the nature of subpoenas and how CPA firms can minimize their professional liability exposures when responding to them.

What is a subpoena?

A subpoena is usually a formal request for documents and/or appearance, typically requested by an attorney in the course of litigation, or by a government agency in the course of a criminal or civil investigation.

What should CPAs do when they receive a subpoena?

CPAs in receipt of a subpoena should consider the information in their client files, along with any recent communications with the client or any parties involved, and then contact the CPA’s professional liability risk adviser or attorney before responding to the subpoena. In evaluating the appropriate course of action for CPAs to take, their adviser may consider the following information:

What is the underlying litigation about? Does the CPA have direct or other knowledge about what the issues are in the litigation?
What is the subpoena asking the CPA to do? Is it requesting that the CPA provide testimony, documents or both? Does the subpoena excuse the CPA from testifying if the CPA provides the documents in advance?
Is the CPA in possession of the information listed? The CPA should review the subpoena and consider whether the firm is in possession of the information. If the information is confidential, such as tax documents, it may be subject to claims of privilege by the client and/or an accountant-client privilege.
Does the subpoena provide a deadline for complying? If the deadline is quickly approaching, or if the subpoenaing party did not provide sufficient time to comply, has the CPA received any communications to suggest the opposing party will grant an extension of time?
What communications has the CPA had with the client? Has the CPA had any contact with the client, the attorneys on the case or the governmental agency? Does that contact suggest whether the CPA is a target or merely a person in possession of information? Is the client taking specific measures to formally object to the subpoena?

Why is the CPA receiving a subpoena?

Typically, an attorney or other party will issue a subpoena because he or she believes that the CPA is in possession of information and documents that will establish facts that are relevant to the underlying case. However, sometimes a subpoena may indicate that the CPA is a target in the underlying case by seeking information that could implicate the CPA as possibly liable for the matter being investigated or litigated.

Is the CPA required to comply with a subpoena? Is a subpoena a court order?

If the CPA has received an order signed by a judge, or a subpoena from a government agency, in most cases the CPA must comply. Government subpoenas generally require compliance, even without client consent or a court order.

However, most subpoenas are preprinted forms that attorneys or other parties fill out to request information. In these cases, accountants are bound by a number of rules and regulations that are intended to protect clients, including Internal Revenue Code section 7216. Under most circumstances, these rules and regulations prohibit the accountant from complying with the subpoena, unless the accountant has undertaken specific measures to protect client confidentiality, including obtaining the client’s consent.

Again, CPAs should contact their risk adviser regarding all subpoenas to evaluate the underlying litigation and the obligation to comply.

Should the CPA report a subpoena to the CPA’s professional liability agent or carrier?

Yes. Regardless of how much or how little information a CPA may have pertaining to the client or former client, it is always important to promptly report the matter.

CAMICO offers policyholders with Professional Liability Insurance comprehensive subpoena and consultation services. These services are designed to assist CPAs in reducing the risk of claims or future litigation. Regarding subpoena expenses that are not related to a reported claim, CAMICO will provide counsel to policyholders to assist in responding to a subpoena seeking documents or testimony. This coverage is treated as a potential claim and offers policyholders a 50% deductible reduction (up to 50K) and locks in coverage during the policy period.

The post How to Respond to Subpoenas appeared first on CAMICO.

Claim Chronicles 124

Amber — Thu, 01 Feb 2024 21:49:27 +0000

Claim Chronicles 124-A

Topic: Trustee Role, Services

Seth Johnson was married multiple times and had eight children from previous marriages. He married Lindsey Johnson in 2012 and was married to her until his death in 2018. In 1991, Mr. Johnson established the Seth Michael Johnson Living Trust. Upon his death, the Trust was to be distributed and administered for Mrs. Johnson’s benefit: cash in the amount of $2.5 million. The trustee was to pay to or for the benefit of Mrs. Johnson the entire net income of the Trust (at least $20,000 per quarter). She had the right to sell and replace the current property with another of equal or lesser value of her choosing (Mrs. Johnson had a life estate in the Trust property).

After her husband’s death, Mrs. Johnson wanted to move to Connecticut to be near her family. She wanted her son to be responsible for building the replacement property pursuant to the Trust provisions. The original home that she occupied was sold (netting approximately $1.7 million); a lot in Connecticut was purchased with funds from the Trust. In 2020, CPA and trustee James Sutton took the position that the Trust would not pay any costs for the replacement residence that exceeded the sale proceeds from the original property. He stated that Mrs. Johnson did not have the discretion to use any portion of the $2.5 million in Trust assets for the construction of the residence, as Mrs. Johnson only had a life estate in the Trust assets. Consequently, Mr. Sutton refused to pay the property taxes for the Connecticut lot.

In the meantime, Mrs. Johnson requested accountings from Mr. Sutton, which complied with his obligations under the California Probate Code. Nonetheless, he did not provide such accountings, which were compliant with the Code. He also allegedly failed to administer the Trust for the benefit of Mrs. Johnson and failed to distribute income to her as required under the Trust provisions.

Select the answer that is the correct response.

1. What is at stake for Mr. Sutton if Mrs. Johnson’s claims are ruled in her favor?
a. He could be suspended or removed from the trustee role.
b. He could be charged with financial elder abuse.
c. He may have to pay for damages pursuant to the California Probate Code.
d. All the above.

2. Are there restrictions with a life estate?
a. True
b. False

3. What best practices can CPAs instill before agreeing to render trustee work? (Answers below)

Correct Answers:

1. d. All the above. If a CPA underestimates trusteeship risk, what may appear to be a safe and simple role can become a complex situation of competing interests, disruptive lawsuits, and financial losses. The result can cause emotional stress and become a sink hole of wasted time and money, especially if clients and beneficiaries are dysfunctional. CAMICO claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding by the trustee or co-trustee regarding their fiduciary duties and responsibilities. Trustees must adhere to laws and regulations governing their role as a fiduciary.

2. a. True. A life estate is a legally binding family transaction that entails certain terms and restrictions on the assets. Depending on the contract and state, often a life tenant needs certain approvals to sell or lease the home and is still responsible for making property tax payments and maintaining insurance as if they still own the property outright.

3. To address the common and unique risk threats associated with trustee services, CPAs can apply appropriate safeguards such as:

Prior to accepting a trustee role, examine the underlying trust document thoroughly and have it reviewed by a qualified trust attorney. There may be opportunities to edit the trust agreement to minimize risk if the trust document is not yet finalized or if the settlor of the trust is still alive. In addition, there may be some ambiguity within the trust document that should be clarified in an engagement letter.
Defensive documentation is critical to minimize potential risks, to prove that you have fulfilled your duties of care, and to keep interested parties informed.
CPAs can complete a client screening evaluation form. Such forms help trustee candidates and their firms assess whether the opportunities fall within their risk appetite and are a good fit.

Claim Chronicles 124-B

Topic: Trustee Role, Services

After battling a terminal illness, renowned painter and philanthropist Rob Smith passed away on January 2, 2017. RST held Rob’s assets and the Smith Art Trust (a sub-trust of the RST) was established to own the rights of and collect royalties from the use of Rob’s name, likeness, and artwork. The trustees of the Art Trust were CPA Keith Jones, Rhonda Sanders and Eric Smith (Mr. Smith’s son from his first marriage with wife Emma Williams). When Mr. Smith passed away, he was in the process of divorcing his third wife, Melanie Smith.

In 2018, litigation emerged over the terms of the RST and the case was settled in 2019, with Ms. Smith receiving a share of the proceeds. Mr. Jones resigned as a trustee in 2020, and the other trustees signed off on his resignation. He confirmed via email (with Ms. Sanders) that the beneficiaries had been notified; she verified that they were informed. Unfortunately, there was no record of Mr. Jones informing the beneficiaries. So in 2021, Ms. Smith filed suit in Probate Court to compel accountings and instruct the trustees to deliver Trust property to her, and to surcharge the trustees. The Petition did not include any allegations specific to Mr. Jones – generally, they were against the co-trustees as a group. The Court ordered the other trustees to prepare the accountings and in 2022, Ms. Smith filed a brief seeking to keep Mr. Jones in the case. She alleged that he was jointly and severally liable for breaches of trust revealed by co-trustee Mr. (Eric) Smith’s accounting. She claimed that Mr. Jones was aware that the other trustees were misappropriating trust assets and that he failed to take any action either because of greed or gross negligence. She also alleged that Mr. Jones’s resignation in 2020 was ineffective, as he failed to notify the beneficiaries required by the trust. There was a hearing held that dealt with who would be the beneficiary of Mr. Smith’s life insurance policy – which listed his wife – however, the couple was in the process of finalizing their divorce. Despite Ms. Smith’s stance to be named the sole beneficiary of Mr. Smith’s policy, the judge ruled against her and limited her claim to one-quarter of the policy and that the remaining amount go to his estate. Mr. Jones’s records indicated that the proceeds from the sales of artwork were correctly allocated to each trust, contrary to the plaintiff’s (Ms. Smith) allegations. His argument was that she was not a beneficiary (so no notice was owed to her) and that he notified all adult beneficiaries of his resignation.

Select the answer that is the correct response.

1. What are the biggest risks / mistakes that CPAs can encounter in a trustee role?
a. Not having a thorough understanding of the trust agreement and abiding by it.
b. Failing to disseminate required accounting.
c. Actual or perceived trustee conflicts of interest.
d. All the above

2. Most CAMICO trustee claims involve dysfunctional family relationships.
a. True.
b. False.

3. Was it Mr. Jones’s responsibility to notify beneficiaries of his resignation as trustee?
a. Yes.
b. No.

Correct Answers:

1. d. All the above. CAMICO claims experience shows that one of the most common sources of risk in trusteeships is a lack of understanding of, or appreciation for, the duties and responsibilities of a trustee. CPAs should be sure to become educated, informed, and competent in the skills needed to render trustee services before attempting to provide them. Fee and billing issues are also a source of risk as well.

2. a. True. In trustee work, it is easy to think you are merely an innocent bystander dragged into a family dispute. Prospective trustees should take long, hard and objective looks at the relationships among the interested parties, especially in family situations, and decide whether the relationship risks can be managed and minimized. Given the frequency of such scenarios, CAMICO strongly encourages CPAs to identify and evaluate potential family risk attributes such as, “What is the potential for dispute among beneficiaries and the settlor? Have there been multiple marriages, with offspring from each? Have there been recent changes to the planned distributions or status of beneficiaries? Or, is there a beneficiary committee that meets regularly and can help mitigate some of these risks?”

3. a. Yes. Mr. Jones was responsible for giving notice (of his resignation as trustee) to “adult” beneficiaries. However, Mr. Jones’s counterargument was that the couple’s 11-year-old daughter was not an adult, and that Ms. Smith was not a beneficiary. Although the Smiths’ divorce wasn’t finalized before Mr. Smith passed away, he had changed his life insurance beneficiary designation and didn’t list Ms. Smith’s name in his will or trust as a beneficiary.

The “Claim Chronicles” are drawn from CAMICO claims files and illustrate some of the dangers and pitfalls in the accounting profession. All names were changed.

The post Claim Chronicles 124 appeared first on CAMICO.

Common Misconceptions that CPAs Believe Why They Will Never Be Sued

Amber — Thu, 26 Jan 2023 23:05:11 +0000

Some CPAs believe that they will never be sued and therefore believe that they don’t need professional liability or other forms of insurance. The reasons for this position vary, but some common ones include, “I don’t make mistakes,” “All of my clients are friends,” or “I do tax work only.” The problem with this approach is that it is not effective risk management and could put even the most cautious CPA firm at risk.

It is important, of course, for CPAs to take every precaution feasible to ensure error-free work, but that may not be enough to ensure a firm’s security. In our litigious society a firm should be prepared for any unexpected bump in the road.

To shed more light on this point, following are some responses to five common reasons CPAs cite for not having insurance:

1. “I have a low-risk practice.”
Having a lower-than-average risk profile still leaves you vulnerable. For example, claims stemming from tax work, perceived as lower risk, occur more frequently than other types.

Tax claims can also be severe (i.e., in large dollar amounts) when triggered by issues such as estate taxes or foreign financial interests. You may be sued for damages you never anticipated, such as a client losing funds from embezzlement in their offices.

2. “I’ve known my clients for years.”
Good working relationships with clients don’t always hold up if the client becomes disappointed for any reason, even if it is unrelated to the CPA’s work. Any significant loss can lead to a dispute. Claims files are brimming with cases of good CPA-client relationships souring due to a variety of problems.

3. “I don’t make mistakes.”
Even when the CPA is doing everything by the book, an unfavorable jury verdict can still put the firm in jeopardy. Public expectations of CPA responsibilities have risen significantly over the years, putting even the best and most cautious CPAs at risk.

4. “I don’t have insurance in order to avoid being sued.”
A CPA who avoids insurance coverage does not always avoid a lawsuit. The party filing a lawsuit won’t even know whether the CPA is covered, and a CPA’s lack of insurance won’t stop an attorney from going after the CPA’s personal assets. The CPA in a claim situation sometimes needs to be defended in a court of law, and professional liability insurance pays for that defense as well as any legal counsel designated by the insurance company to defend the CPA.

5. “All of my assets are in my spouse’s name.”
With technology so thoroughly integrated into society, it’s easier than ever to track down someone’s assets. Putting assets in a spouse’s name will not make them immune from a lawsuit.

A prudent approach to risk management begins by having a reliable insurance program that includes comprehensive risk management resources designed specifically for CPAs. When the firm fully engages in utilizing those resources, it is well on its way to a more secure future.

The post Common Misconceptions that CPAs Believe Why They Will Never Be Sued appeared first on CAMICO.

31 Reasons CPAs are Sued

ssAdmin — Wed, 05 Apr 2017 12:06:00 +0000

CPAs who are sued are often in the wrong place at the wrong time with the wrong decision. These situations that landed CPAs in court are real—drawn from CAMICO’s claims files.

1) Trusting a client too much

A 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 transaction

A 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 data

A 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 divorce

A 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 paid

A 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 letterhead

Yes, 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 out

A 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 fraud

A 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 scheme

A 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 pressure

An 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 anyway

Two 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 is on a deadline

With 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 had become overbuilt. Facing foreclosure, the client sued.

13) When a client repeatedly ignores advice

Year 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 is having business trouble

A 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 had faked transactions for his investment company. When the truth came out, hundreds of third-party investors sued.

15) When the bookkeeper embezzles

A 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 clients

A 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-taker

A 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 implications

A 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 down

A 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 statements

Owners 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 documentation

A 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 finances

A 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 expenses

A 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 disorganized

A 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 expertise

A 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 industry

A 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 review

A 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 information

A 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 victimized

A 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 someone

A 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 disaster

For 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.

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