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cash handling. In addition, inspect documentation prenuptial agreement.
received and inform the client, in writing, of red The CPA recalled telling the husband that he
flags or unusual items. believed he would be entitled to half of the joint
account but did not have the prenuptial agreement
FAVOR TO A FRIEND in hand. As such, he verbally advised the husband to
The case: A CPA’s family friend asked for as- consult with his divorce attorney on the issue. There
sistance with an IRS audit. The CPA appropriately was no documentation related to this discussion with
requested an engagement letter and retainer from the husband.
the friend but did not receive either. Despite this, The outcome: The case settled with defense
the CPA began work on the engagement. When he costs and an indemnity payment of approximately
ran into difficulties obtaining payment, he ceased $1.5 million.
services without notification to the friend and com- The lesson: Answering seemingly benign
menced a $10,000 fee collection action. In response, questions based on incomplete or partial informa-
the friend filed a counterclaim against the CPA tion can have significant consequences. Avoiding
claiming damages of more than $10 million. answering these questions, while preferable, is not
Although the friend failed to sign the engage- always possible or practical. Whenever advice is
ment letter, pay the retainer, or provide documenta- provided, follow up the discussion with a written
tion the CPA needed to respond to the IRS, an communication, such as an email.
expert found multiple breaches of the CPA’s standard The other lesson: A conflict of interest, or
of care, including the CPA’s failure to accurately even the appearance of an ethical violation, can
inform the client of the status of the IRS audit and greatly complicate the defense of a claim. Here, the
that he had stopped working on the same. The CPA’s defense expert opined that despite the short period
failures resulted in the audit’s closing without a during which the conflict existed, the case would
response, despite numerous attempts by the IRS to be very difficult to defend, and the CPA should not
contact the CPA. have discussed the issues with the husband.
The outcome: The case settled with defense
costs and an indemnity payment of nearly A FINAL LESSON
$1 million. In all of these cases, the engagement letter was either
The lesson: If providing services to family nonexistent, as in the cases of “Failure to Search” and
members and friends, follow the same protocols “Off-the-Cuff Advice,” or inconsistent and ineffec-
you would with any other client and treat them as tive, as in the cases of “Creeping Scope” and “Favor
such. This includes performing client acceptance to a Friend.” Had engagement letters been in place,
procedures to ensure they are the right fit for your the outcomes may have been different.
firm, obtaining a signed engagement letter before
commencing work, and providing written notifica- Sarah Beckett Ference, CPA, is a risk control director at
tion to the client if ceasing or terminating services. CNA. For more information about this article, contact
The other lesson: Fee suits almost never lead specialtyriskcontrol@cna.com. ■
to positive outcomes. Instead, they often lead to
retaliatory malpractice claims by the client to avoid Continental Casualty Company, one of the CNA insurance companies, is
the underwriter of the AICPA Professional Liability Insurance Program.
payment. It is best to avoid the issue and stay in the
Aon Insurance Services, the National Program Administrator for the
black with good billing and collection practices. AICPA Professional Liability Program, is available at 800-221-3023 or
visit cpai.com.
OFF-THE-CUFF ADVICE This article provides information, rather than advice or opinion. It
is accurate to the best of the author’s knowledge as of the article date. This ar-
The case: A CPA prepared tax returns for a ticle should not be viewed as a substitute for recommendations of a retained
married couple for a number of years until the professional. Such consultation is recommended in applying this material in
any particular factual situations.
couple informed the CPA of their impending
Examples are for illustrative purposes only and not intended to estab-
divorce. During the couple’s divorce proceedings, lish any standards of care, serve as legal advice, or acknowledge any given
the CPA provided advice to the husband for a factual situation is covered under any CNA insurance policy. The relevant
insurance policy provides actual terms, coverages, amounts, conditions, and
short time without first obtaining a waiver from
exclusions for an insured. All products and services may not be available in
or officially terminating the relationship with the all states and may be subject to change without notice.
wife. The wife claimed that within that period,
the CPA wrongfully advised the husband that he
could withdraw money held in joint bank accounts
even though such withdrawals violated the couple’s

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