Page 450 - JoFA_2022

CPA firms should also consider including a provision in ■ The “Use of a Third-Party Service Provider” interpreta-
the agreement that requires the expert to protect confidential tion (ET §1.300.040) requires the firm to plan and
information received. While the “Disclosing Information supervise the third party’s work.
to a Third-Party Service Provider” interpretation (ET ■ Section 10.22(b), Reliance on Others, of Treasury
§1.700.040) indicates that entering into a contractual agree- Circular 230, Regulations Governing Practice Before the
ment regarding the protection of confidential information Internal Revenue Service (31 C.F.R. Part 10), requires
is, along with other conditions specified in paragraph .02 tax practitioners to exercise due diligence when relying
of ET §1.700.040, an option in lieu of client consent, given upon the work product of another person.
sensitivity regarding data privacy and protection, this provi- ■ Paragraph .12 of AU-C Section 620 states that the
sion is recommended. auditor should evaluate the adequacy of the work of the
Fee arrangements should be addressed in the engagement specialist for the auditor’s purposes.
letter with the third party. Although referral fees or com- Although AICPA Statement on Standards for Tax
missions are, in certain circumstances, permissible under the Services (SSTS) No. 3, Certain Procedural Aspects of
“Commissions and Referral Fees Rule” (ET §1.520.001), Preparing Returns, generally permits tax practitioners to
consider the impact of this fee structure on the firm’s objec- “rely, without verification, on information furnished by …
tivity, including how such a fee would be viewed in hindsight. third parties,” it also states that they cannot “ignore the
Finally, consider including a provision that requires the implications of information furnished and should make
expert to maintain professional liability, cyber, and/or other reasonable inquiries if the information furnished appears
applicable insurance coverages. to be incorrect, incomplete, or inconsistent either on its
face or on the basis of other facts known to the member.”
Step 3: Notify the client and obtain consent SSTS No. 3 also requires tax practitioners to make
The “Use of a Third-Party Service Provider” interpretation appropriate inquiries to determine if the taxpayer has
(ET §1.150.040) requires the CPA firm to inform the client, other information required by the taxing authority, such as
preferably in writing, that a third party may be used on the sufficient documentation.
engagement. This disclosure is required before confidential The depth of the CPA’s review depends upon many
information is provided to the third party and may be ac- factors, including, but not limited to, the complexity and
complished via a provision in the client engagement letter. significance of the expert’s work, the expert’s experience,
However, if tax return information will be provided to the and the CPA’s prior experience with the expert. Remember
third party, the client’s consent, including specific required to document the review performed, including discussions
language, may be required under Internal Revenue Code Sec. with the client and expert.
7216. Sample disclosures that comply with the requirements
of Sec. 7216 are available to AICPA members. ADDITIONAL THOUGHTS
In addition to obtaining client consent to disclose Referring clients to experts, even if their work is not
confidential information to a third party, the firm should incorporated into the CPA firm’s deliverable, may result in
manage the client’s expectations regarding any limitations a professional liability claim. Before doing so, follow the
of the firm’s responsibility related to the expert’s work. For advice outlined in the article “Unintended Consequences
example, if an expert is engaged to calculate tax credits of Professional Referrals.”
or accelerate deductions, consider obtaining the client’s
written acknowledgment that it understands that a tax- Deborah K. Rood, CPA, is a risk control consulting director
ing authority could disagree with the expert’s calculations at CNA. For more information about this article, contact
or position taken on a subsequent return, and that, if this specialtyriskcontrol@cna.com. ■
occurs, additional tax, penalties, and interest may be assessed
for which the client will be responsible. In addition, the Continental Casualty Company, one of the CNA insurance companies, is the
client should acknowledge it wishes to proceed based on underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance
Services, the National Program Administrator for the AICPA Professional Liability
this understanding.
Program, is available at 800-221-3023 or visit cpai.com.
This article provides information, rather than advice or opinion. It is accurate
Step 4: Review the expert’s work to the best of the author’s knowledge as of the article date. This article should not be
viewed as a substitute for recommendations of a retained professional. Such consulta-
Clients, and CPAs, may believe that where an “expert” is
tion is recommended in applying this material in any particular factual situations.
engaged, a CPA firm may incorporate its work without Examples are for illustrative purposes only and not intended to establish any
question. However, a CPA firm should not accept the standards of care, serve as legal advice, or acknowledge any given factual situation
expert’s work at face value. Some level of supervision and/or is covered under any CNA insurance policy. The relevant insurance policy provides
actual terms, coverages, amounts, conditions, and exclusions for an insured. All
review should be conducted, as noted in various professional
products and services may not be available in all states and may be subject to change
standards. For instance: without notice.
journalofaccountancy.com November 2022 | 5