CPAs face a huge amount of responsibility, and with responsibility comes risk. We can make sincere mistakes, or a client may allege that we made a mistake and should have foreseen potential pitfalls. On top of all that is an ever-changing mountain of financial and tax regulations which CPAs are expected to constantly stay on top of.
The AICPA recommends and certain states mandate that accounting professionals and firms carry professional liability insurance, but a firm can still find itself wasting time in court even with insurance. Accounting firms should thus identify which areas often pose the biggest liability risks and know how they can reduce risk.
Know what you know
Accountants as a profession are transitioning into true financial professionals, willing to offer clients useful advice on how to get the most out of their assets.
But there is a dangerous downside to this trend. CPAs who have learned to do additional financial work in one field may decide that they can give advice in a separate field, often out of a desire to help clients and an unwillingness to admit that they do not know everything. And if a CPA performs a service for the first time and gets used later, their lack of professional expertise can be held against them.
It is commonly said that the wisest men in the world are those who know just how ignorant they are, and CPAs should remember that. Instead of thinking that you can just learn what the client wants you to do on the fly, do not hesitate to recommend other, more specialized accountancies. You will reduce the risk of making a mistake and facing a potential lawsuit and your client will appreciate your firm’s honesty.
Cybersecurity and the Cloud
Accountants hold huge amounts of personal and financial information as part of their profession, information which criminals and hackers would love to obtain. The consequences of a data breach are not just embarrassment and lost reputation. Clients will look to sue, and small accounting firms cannot count on being protected from hackers by the shield of obscurity.
There are plenty of guides out there on how accountants can improve their cybersecurity. Basic measures such as not using Microsoft XP or Vista or purchasing cybersecurity protection programs will do a great deal to deter hackers who will search for easier targets. Cybersecurity training is also important so that employees can be aware of threats such as phishing, malware, and even basic concepts such as that Nigerian prince is not actually going to send you a million dollars.
The importance of cybersecurity and data protection takes on a further dimension when the growing popularity of cloud computing is factored. While storing data on the cloud can be cheaper and allow for increased scalability, security breaches with cloud vendors have occurred. Accounting firms should thus do their due diligence and select a cloud vendor with a good security reputation and inform clients that their information will be stored on the cloud. If your clients are concerned, it is better for them to be aired out now than after a data breach.
The Importance of Engagement Letters and Writing
Accountants have to remember that even if they did everything right, they are still at risk of being sued. A client whose financial situation suddenly gets worse can easily decide that you could have done something to prevent it even if that is not the case.
And if the client’s argument can get past a motion for summary judgment, accountants can find themselves stuck with the expenses both in time and money of a court case for years. Do not forget that it can be easy for a lawyer to spin a story to some jury about how the evil financial mogul defrauded the poor common American.
It is important for these reasons for accountants to document everything and not just that which is required by professional standards. Engagement letters, in particular, are an important documentation tool. They define what services the accountant provide, what responsibilities the accountant and the client share, and any limitations. Most importantly, accountants should provide only the services described in the engagement letter and do not try to push the boundaries. If an accountant wants to provide additional services, draft a new engagement letter.
Accountants may hesitate about providing letters to established clients. They fear that it would indicate a lack of faith and that they could potentially lose a client by doing so. But the downside of a lost client is trivial compared to the downside of a long and expensive trial.