Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at firstname.lastname@example.org.
As the saying goes, “There is no friend like an old friend.” The same can be true in your professional life as long-standing client relationships are often the most satisfying. They reinforce what it means to truly be a professional, guiding
and advising clients across the arc of their working lives and, ideally, seeing them achieve financial security and peace of mind.
While this is a common enough scenario, it is by no means inevitable. Over time, evolution occurs within the accountant-client dynamic, whether due to advancing age, fickle fortune, or changes in the family or the business, to name a few. It is in these
changes that the risk of professional liability lurks. Change is not intrinsically bad, of course, but when it is not recognized the practitioner risks losing contact. By clinging to what was, rather than addressing what is, you will not be able to
help the client plan for what shall be.
According to data gathered by professional liability insurance carriers, practitioners are statistically at a higher risk of claims being asserted by the clients with whom they have worked the longest. No friend like an old friend, indeed.
examples are based on real-life situations, gathered from decades of professional liability claims. (The names and businesses have all been changed.)
Swimming in New Waters
For decades, Bill Often, CPA, handled tax compliance for his client Precious Properties LP and its general partner, Mr. Grant Land. Land pursued deal after deal over the years, cleverly spotting real estate development opportunities and almost always
coming out ahead. For each new tax year, Bill’s firm issued a standard engagement letter that contemplated end-of-year planning and preparation of returns.
Along came a deal in which Land spied an opportunity for a Section 1031 exchange – his first foray with this strategy. He informally asked Bill to help him play by the IRS rules, in real time, as the deal unfolded. This was a new role for Bill after
all their years working together. Without so much as a handshake with Bill, Land launched himself into his first 1031 deal. Land was also consulting with counsel and, at one point, another CPA firm. Bill was aware that Land was taking advice from
multiple sources, which appeared sensible given the novelty and high stakes.
As the deal played itself out, Land’s approach to Section 1031 compliance was somewhat erratic, with frequent changes in his proposed financing structure and his plans for use of the replacement property. Critically, no oral communications were
documented and the email trail was spotty. In the end, mostly due to poor communication, there was an unexpected whopper of a tax bill for Precious Properties. Land was displeased, and he expected to be made whole.
The attorney and the other CPA firm that had briefly consulted Precious Properties were nowhere to be found near the financial crater; but there was Bill, scratching his head and wondering how this had all blown back onto him. With no engagement letter
addressing his 1031 consulting role, Bill was exposed. After decades of increasingly informal communications with Land, Bill had not felt the need for a deal-specific engagement letter. Nor had he felt the need to see that notes of meetings and phone
calls were created.
Looking back, as the deal raced along, Bill should have been on the sidelines calling the plays, if not in the huddle. But it was never made clear between these two old colleagues exactly who was responsible for which decisions, nor when they needed to
be made and communicated. This late-career innovation by Precious Properties caught Bill by surprise, and he was not nimble enough to adjust. He relied on well-worn patterns of behavior, and that kept him from seeing change for what it was. It proved
to be a costly omission.
Caught in a Carbon Copy
The next example involves a long-standing, now-elderly client who, in the course of updating and restructuring his estate plan, created a trust for his grandchildren. An estate attorney drafted the trust, but at the client’s request his CPA was
“cc’d” on the draft sent by counsel to the mutual client for review. The CPA glanced through the trust instrument, billed a few tenths of an hour for having done so, and then filed it away. Sometime later, a flaw in the trust came
to light and both the attorney and the CPA were held to account. The CPA believed that no formal (or even informal) communication had been necessary to distance himself from responsibility for what amounted to merely an introductory review of the
In this situation, the long and casual client relationship impaired the practitioner’s sense of risk management, leaving him exposed. What might he have done instead? Perhaps the CPA should have sent a quick email thanking the client for forwarding
a copy of the trust “for my information,” and adding “the propriety and legality of the document are, of course, up to counsel.” This simple recital would most likely have held the wolves at bay.
Other situations in which changes in the accountant-client relationship impair risk management can derive from client success stories, such as accumulating wealth, sale of a business, or new investments. Each of these situations necessitates ongoing mastery
of the tax code, awareness of potential conflicts of interest (involving business partners and/or family members), adequate staffing, and clear lines of communication with the client. The flip side of this coin involves client setbacks, such as business
failure, spousal divorce, or business breakup. After years of relating to one another against the backdrop of a particular status quo, working with a long-standing client as he or she goes through a stressful life event should cause the practitioner
to see the client as if through new eyes. If not, you put yourself at risk of missing both the perils and opportunities that may be present. The risk of conflicts of interest should come into view (as in good times), as should the risk of overextending
the limits of your particular skill set (as in good times).
Lest you shrug off this lesson and consider yourself always on top of your clients’ circumstances because you send them an annual tax questionnaire, consider how little thought clients (well, at least some of them) invest in this annual ritual.
Consider how much more information you actually receive through a telephone call or a meeting of one kind or another. (In either case, take notes!) Does your questionnaire include, “Are you beginning to show signs of dementia?”
I didn’t think so.
Jonathan S. Ziss, JD, is a partner with Goldberg Segalla LLP in Philadelphia. He can be reached at email@example.com.