PICPA - CPA Pro Bono Work: Taming the Books Without Being Bitten

CPA Pro Bono Work: Taming the Books Without Being Bitten

Spring 2000

Andrew P. Motel, Esq., and Francis J. Farina, Esq., CPA


Inevitably, like doctors, lawyers and other professionals, all accountants are asked to donate their time or expertise to charitable or nonprofit organizations. CPAs donate their time in a myriad of ways—as Little League or soccer coaches, as Boy Scout leaders, as community musicians and even as manual laborers. However, the area in which CPAs possess professional expertise can offer both valuable volunteer opportunities and potential liability pitfalls. Although most malpractice claims against CPAs arise from paid work (particularly tax or attest services), the gratuitous provision of professional services can expose a CPA to liability for such work. Thus, before accepting any volunteer assignments for a non-profit organization, a CPA should weigh the risks associated with performing the work to the benefits to be derived—personally and professionally. The purpose of this article is to provide cautionary instructions to CPAs contemplating volunteer work in order to avoid claims of malpractice and the risk that such claims pose. By adherence to several simple ground rules, CPAs can pursue praiseworthy and valuable work while being relieved of worry over undue and unexpected exposure to lawsuits.

The Value of CPA Pro-Bono Work
As experts at what they do, CPAs can offer valuable skills to those in need through volunteer activities. It is well documented that CPAs can have an impact on their communities through volunteer work. Recent articles in this publication and in the Journal of Accountancy have trumpeted the salutary effect of such work. In a November 1999 Journal of Accountancy article entitled "Giving Back: Pro Bono Accounting Services," the authors cite several organizations that have successful pro bono programs, including Accountants for the Public Interest (API). API has 21 affiliate organizations nationwide that coordinate pro bono efforts by matching CPA volunteers with individuals or organizations needing their expertise. API has two affiliates in Pennsylvania—Community Accountants of Philadelphia; and Western Pennsylvania Community Accountants, Inc., in Homestead (near Pittsburgh). In Illinois, the Community Service Division of the Illinois CPA Society and CPAs for the Public Interest provide direct volunteer assistance, workshops and collaborative projects to assist nonprofit organizations in improving financial management. The PICPA has traditionally encouraged its members to become involved in volunteer services through specific chapter committees and on an "at-large" basis. See "Calling All CPAs," Pennsylvania CPA Journal, Winter 2000, Millennium Insert, p. XII.

In addition to the value provided to the recipient nonprofit organization, CPAs can gain great value from volunteering—the personal satisfaction of providing assistance, the opportunity to sharpen one's skills, and a chance to sell oneself and one's expertise. However, we live in a litigious society and it is not unusual for individuals (including CPAs) to be sued whether or not a valid claim exists. This article is not intended to dissuade anyone from doing pro bono work, but raises a few issues for consideration before one jumps in feet first.

The Applicable Standard of "Reasonable Care"
Pennsylvania law requires that all professionals exercise "reasonable care." The failure to do so may be negligence. Of course, accountants know that deliberately false and misleading information is fraud. Fraudulent acts expose a CPA to liability to the client and others who suffer losses from relying on false and misleading information disseminated by the CPA. This article concerns only liability for negligence, and specifically, the special considerations that should be addressed when rendering services to charitable or nonprofit organizations.

The most important principle to understand is that a CPA's liability for negligence is the same, regardless of whether the work is done for pay or free of charge. It makes no difference that the client is not paying for the services—Pennsylvania law requires that a CPA always exercise "reasonable care" or the same skill in the performance of his undertaking as a reasonable, prudent, skillful accountant would use under the circumstances. Stated another way, the CPA is required to exercise the skill and knowledge normally possessed by a member of that profession or trade in good standing in the community. Though some states (such as Illinois) have enacted what are commonly referred to as "Good Samaritan" laws to protect individuals working for charitable causes from civil liability for negligence, no such laws currently exist to protect accountants in Pennsylvania. Moreover, the potential exists under Pennsylvania law for a CPA to be held responsible for not only negligence causing economic damage to the client, but possibly also injury to third parties relying on the work when the CPA could reasonably anticipate such reliance.

Ground Rules to Consider When Accepting Pro-Bono Assignments
Given the possible consequences, a CPA might find charitable work simply too risky given the absence of compensation or appropriate professional malpractice insurance. However, there are several basic ground rules that the CPA can follow that will significantly limit exposure to negligence claims arising from charitable work. If the CPA follows these ground rules, work for charitable organizations will continue to be personally rewarding and the risk of being sued will be minimized.

Rule 1: Have the charity execute a release or indemnification.

Generally, an appropriately written release will protect an accountant for his/her failure to exercise reasonable care, or "negligence," by including one or all of the following:

* An exculpatory clause which immunizes the accountant for negligence.

* An indemnity clause which holds the accountant harmless by requiring the client to bear the cost/responsibility if the accountant makes a mistake.

* A "hold harmless" clause that has the client assume the liability of the accountant in the event of negligence.

If an accountant is doing work through an umbrella organization (such as API), he or she should determine whether that organization has a release form which covers him or her (and not just the organization!). Many such umbrella organizations utilize such releases and should be willing to include you in their release.

Rule 2: Always use disclaimer language.

Disclaimer language proclaims to all the manner in which they may (or may not) rely on your work. A well-worded disclaimer can substantially diminish the likelihood that any person could reasonably rely on your work.

Rule 3: Be sure you have adequate insurance that covers the charitable work that you do.

Although professional liability insurance policies are unique and require individual analysis, several general conclusions are possible. First, policies always contain exclusions limiting the scope of coverage. For instance, your firm's or employer's policy may not cover charitable work done off the premises or "on the side." Furthermore, the policy might not cover non-traditional services such as financial planning or specialized consulting areas such as healthcare, construction, litigation support, employee benefits or computers (e.g., Y2K). CPAs should understand the scope or existence of their coverage and exactly what type of work is covered by the policy.

Second, most professional insurance policies are of a "claims made" type rather than an "occurrence" type. Under a "claims made" policy, coverage is determined when the claim is first reported, rather than when the incident occurred. This is a very important consideration, since statutes of limitation may allow assertion of a claim against a CPA many years after the work was actually performed, when coverage might not be in force.

A third type of coverage, "tail" coverage, protects a CPA previously covered by a "claims made" policy for claims first made outside the period of the claims made policy.

Finally, CPAs not currently in public practice—and thus, not likely covered by any malpractice policy—should carefully consider the exposure before performing any pro bono work involving their professional skills. This work will not be covered by an umbrella policy maintained in connection with your auto and homeowners liability insurance. The costs of obtaining a malpractice policy solely for volunteer work, and maintaining that coverage for as long as a claim might be asserted, may be prohibitive, particularly since such coverage may need to be maintained for many years to "cover your tail."

Rule 4 - Use an engagement letter.

Failing to meet client expectations is often the most prominent factor in liability lawsuits. That is, the CPA's reputation and expertise as a trusted advisor can result in lawsuits and malpractice claims when the client does not share the same understanding as the CPA of the limits on the work that the CPA is performing. Many umbrella organizations arranging volunteer work by CPAs specifically avoid attest or tax work, and instead focus on helping charitable organizations improve their expertise or organize their operations. You should, too.

As experts at what they do, CPAs can offer valuable skills to those in need through volunteer activities. However, the CPA should be mindful of the potential legal liability that can accompany such volunteer work. With a little front-end planning, a CPA can prevent much back-end woe.

Francis J. Farina, CPA, Esq., is a sole practitioner attorney/CPA in Devon. The focus of his practice is securities and consumer class action cases. He is admitted to the Pennsylvania and New York bar and is licensed to practice as a CPA in Pennsylvania, Virginia and New York.

Andrew P. Motel, JD, Esq., is a sole practitioner attorney in West Chester. A member of the Pennsylvania Bar since 1988, he specializes in personal injury and insurance cases.

Copyright Pennsylvania Institute of Certified Public Accountants Spring 2000