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PROFESSIONAL LIABILITY SPOTLIGHT

Client breakups can

create malpractice risk

By Karen Nakamura, CPA

onsider this: Therefore, consider including an engagement
Seasonal C A CPA prepared joint income tax returns letter provision that puts the onus on the client to
spikes for a married couple. After informing the CPA of inform the CPA of any changes in facts, including
the couple’s pending divorce, Spouse A engaged marital status and business ownership, on a timely
March the CPA to perform tax consulting services related basis. Similarly, include a provision stating that if

and to a privately held business interest. Spouse A informed of a pending dispute, the parties acknowl-
used the CPA’s advice to make certain binding tax
edge that the CPA may have a conflict of interest
August elections regarding the business that negatively and may be unable to provide some or all of the
affected the value of the interest. Spouse B sued
agreed-upon services.
the CPA, alleging that the CPA conspired with
The months when Spouse A to minimize the business’s value, thus WHAT TO DO AFTER A DISPUTE IS ANNOUNCED
divorce filings minimizing Spouse B’s divorce settlement. Litiga- Breaking up can be hard to do, especially when
consistently peak. tion was protracted and expensive as Spouse B was the parties are emotional and feel they have been
unwilling to compromise, taking their anger and wronged. No matter how amicably a breakup starts,
Source: “Is Divorce animosity out on the CPA. divorcing parties are inherently at odds, and the
Seasonal? UW Study
Shows Biannual Spike in As this claim scenario illustrates, it’s easy to get CPA can end up in the fray. Understanding how to
Divorce Filings,” UW News, caught in the middle of feuding parties. Once noti- manage risk can help lead to a successful outcome.
Aug. 21, 2016. fied of an impending breakup, whether a personal
divorce or a business split, a CPA should act quickly Communicate the new rules of engagement
to mitigate professional liability risk. A key first step when working with disputing cli-
ents is to articulate the engagement’s ground rules,
WHAT ARE THE RISKS? which may differ from those previously followed.
Conflicts of interest are often asserted in divorce The ground rules should address:
claims. One side typically asserts that the CPA Your limited role as tax preparer only:
made a decision or took an action to benefit the Explain that you will not be able to provide tax
other side. While an actual or potential conflict of advice to either side until the divorce is finalized or
interest, in and of itself, does not result in a profes- the dispute is resolved. Doing so would be a conflict
sional liability claim, the appearance of a threat of interest because advice may benefit one spouse
to the CPA’s objectivity can weaken their defense to the detriment of the other, either at present or
against such claims. in the future. Recommend the parties each obtain
When dealing with disputing parties, CPAs may individual representation to advise them. Your role
also be accused of violating Internal Revenue Code is no longer that of an adviser but a neutral tax
Sec. 7216 or the “Confidential Client Information preparer. Be Switzerland.
Rule” (ET §1.700.001) of the AICPA Code of The clients’ responsibility for making
Professional Conduct. decisions: Explain that while you may provide
Finally, getting stuck in the middle of someone options for the clients’ consideration, they must
else’s dispute (and drama) can result in increased mutually agree to and make all decisions regarding
costs, time, headache, and stress — none of which their tax returns. Explain that you will require
are welcomed by the CPA. all sides to provide written confirmation of their
decisions, including, but not limited to, filing
PROACTIVE RISK MANAGEMENT STEPS status, which you will then follow when preparing
CPAs typically assume that a client’s basic facts re- the tax return. Preferably, instructions will come
main the same year after year, unless informed oth- from the clients’ attorneys. Retain documentation
erwise. However, facts can change, leaving a CPA to of client communications and decisions made in
scramble to address a client’s changing dynamics. the workpapers.

4 | Journal of Accountancy January 2023