Page 174 - JoFA_2022

PROFESSIONAL LIABILITY SPOTLIGHT

Small actions, big fallout:

Lessons from large claims

By Sarah Beckett Ference, CPA

nfortunately, seemingly benign actions do not the service, and follow the AICPA Statement on
Where claims Ualways turn out to be so. Even small decisions Standards in Personal Financial Planning Services.
come from or quick conversations may have significant, and
Claims asserted expensive, consequences. Consider these real-life CREEPING SCOPE
against CPA firms claims asserted against CPAs in the AICPA Profes- The case: For decades, a CPA was engaged to
in the AICPA sional Liability Insurance Program and take note of provide tax compliance and compilation services
Professional lessons that were learned the hard way. to a medical practice with a history of declining
Liability Insurance revenues. After several years of providing services,
Program in 2021 FAILURE TO SEARCH the CPA eventually issued an engagement letter.
by area of practice: The case: A CPA prepared tax returns and A year later, the client terminated its controller and

• Tax services, 73% provided bill-paying services for a client. When the bookkeeping staff, accusing them of embezzling
• Accounting and client inherited a substantial amount of money, they millions of dollars via a fictitious payroll scheme.
bookkeeping asked the CPA to assist in managing this newfound The client, alleging that the CPA’s engagement
services, 9%
• Consulting wealth. The CPA agreed and invested approxi- scope was much broader than what was included
services, 8% mately $2.5 million with an investment adviser who in the engagement letter, asserted that the CPA
• Audit and attest was recommended by another client of the CPA. should have detected the embezzlement. Unfor-
services, 5%
• Fiduciary services, 4% Eventually, the invested funds were lost due to the tunately, and despite what was reflected in the
adviser’s alleged fraudulent activity. The client filed engagement letter for a prior period, the CPA’s
Source: CNA Claim suit against the CPA for failure to exercise due workpapers and client communications suggested
Database, underwritten
by Continental diligence in selecting the adviser. a broader and poorly defined engagement scope.
Casualty Company While the CPA’s actions were taken in good In addition, the CPA had copies of the client’s
Copyright © 2022. All faith and in the belief that they were in the client’s payroll records showing client employees claiming
rights reserved.
best interests, the CPA did not perform any due hours far in excess of customary working hours (in
diligence procedures related to the adviser, relying some cases, claiming nearly 24 hours in a single
solely on the recommendation of the other client. day), which arguably should have been a red flag.
A simple internet search, however, would have Finally, the CPA’s workpapers reflected knowledge
revealed that the investor was previously convicted of of substantial weaknesses in the medical practice’s
financial crimes. internal controls, but the CPA never conveyed these
The outcome: The case settled with defense concerns to the client.
costs and an indemnity payment of more than The outcome: The case settled with
$500,000. defense costs and an indemnity payment of more
The lesson: While the depth and type of due than $900,000.
diligence procedures vary based upon the situation The lesson: Consistent use of annual engage-
and service to be provided, performing a basic ment letters helps manage the client’s expectations
internet search before accepting a new client, or regarding the scope of services and the limitations
making a recommendation to an existing one, is a of such services. If a client requests additional
quick and easy — but crucial — step for a CPA to services, document the additional scope of work
take, even if the referral source is a trusted one. through a new engagement letter, an addendum to
The other lesson: Clients often seek a CPA’s an existing engagement letter, or, at a minimum,
advice related to investments. However, providing an email with the client.
incidental advice is fraught with risk, and the CPA The other lesson: To help defend a claim
may be blamed for poor investment performance. asserting a failure to detect an embezzlement,
Avoid providing investment advice unless you regardless of service, inform the client, in writing,
have the requisite experience in the area, have of improper segregation of duties or other internal
been engaged via a separate engagement letter for control weaknesses, especially those related to

4 | Journal of Accountancy May 2022