How can accountants mitigate the risk of professional liability? (Tom Shroyer discusses with "Reel Lawyers")
Well, we have actually a whole menu of items that we recommend for CPAs. The most important and I think the most common and easiest things to do are, first and foremost, if a CPA firm can do only one thing and one thing only, it would be to disengage and to terminate all of their “bad” clients. And I put “bad” in quotes because, of course, nobody likes to refer a client as being bad. But the fact of the matter is that an undeserving client, somebody who is unworthy of having the services of the CPA, is far, far more likely to bring a claim when something goes awry than a quality client.
Bad clients are people who are complaining, whining. They’re not happy. They’re quick to demand money reparations when they perceive an error has occurred. They switch professionals frequently. They often carp about or are late in payment of bills and, frankly, don’t respect – in many ways, don’t respect or value the professional advice that they’re getting. And so it’s a whole constellation of issues that surround who is or isn’t a bad client.
The other big thing is to make sure that we’re documenting our communications clearly. So often, the failure to document advice given to somebody or to follow up on the refusal of a client to honor a CPA’s advice is both a precursor to a claim and also makes it very difficult to defend.
And, finally, another easy, really no-brainer is to make sure that when an engagement is started, when a new client comes in, or when a client is asking for a new kind of service, to make sure that that’s documented in a clear, effectively written, signed agreement, so that everybody knows what service the CPA is providing and, hopefully, what they’re not, so that there’s no guesswork about what the accountant’s responsibility is to the client.