By Suzanne M. Holl, CPA
Although the upcoming tax season shows signs of returning to some level of normalcy not experienced since before the pandemic, CPA firms continue to face unique challenges and risks that they should not ignore. With more than 60% of CAMICO’s claims originating from tax-related matters, addressing and managing the stress points associated with problematic clients can significantly improve a firm’s risk profile. CPA firms need to be proactive and prioritize performing the “right services” for the “right clients.”
Obtaining clarity on the following questions may help you identify client scenarios that may pose higher risks to your firm.
Evaluate your client list, and be sure you do so before the final phase of tax season. Now is the time to decide whether clients remain a good fit for your firm. Disengaging from clients that do not meet that threshold — ideally after they have paid their bills — will better position you going forward.
To help in your assessment, the following are red flags of potential problem-clients that, if not managed appropriately, could present elevated risks:
Pay particular attention to clients who are slow in accommodating your requests, do not return your calls, or are otherwise nonresponsive. When a client seems unwilling to provide you with the information needed to complete an engagement, assess the underlying cause: is the problem merely sloppy recordkeeping, or is the client deliberately delaying or withholding information? Be cautious in situations where it appears that documents are deliberately withheld, or you are urged by a client to proceed without appropriate or sufficient documentation.
Abrupt changes in a client’s behavior may be indicative of a failing business, financial problems, or other personal problems. Trying to uncover the source of the problem could be beneficial, but, whatever you do, don’t ignore the signs of a deteriorating relationship. Likewise, always be on the lookout for potential conflicts of interest. It is extremely important to examine potential or actual conflicts of interest from each party’s point of view, considering the client’s perspective as well as those of other owners, investors, partners, beneficiaries, spouses, etc.
Conflicts of interest are too often a major factor in professional liability claims against CPAs. Part of the problem is that if CPAs are not sensitive to their existence, conflicts of interest will not be perceived before an incident triggers a claim. If potential conflicts are identified, you must assess whether you can objectively represent the parties involved. If you determine you can, assess whether there are reasonable safeguards to eliminate or reduce the threat to an acceptable level.
Firms that “dabble” have a much higher risk of having a claim against them. The art of saying “no” is an important, but often overlooked, risk mitigation tool.
If clients seek your help with transactions or activities outside your comfort zone or skillset (Did someone mention Employee Retention Credit or virtual investment opportunities such as nonfungible tokens?), you will be better served suggesting they seek the advice and counsel of professionals with expertise in those areas.
Recognize, embrace, and maintain your competencies. As such, it is critical that CPAs never feel compelled to dabble in practice areas outside their expertise. Frankly, this rule is fundamental to our profession: the Code of Professional Conduct’s General Standards requires CPAs to only undertake professional services they can reasonably expect to complete with professional competence.
Advising clients regarding digital asset transactions, for example, is an opportunity for some firms. Unfortunately, these opportunities also pose considerable liability exposure for those who lack the requisite skills. Arm yourself with knowledge, know your limitations, and be willing and able to say “no.”
Effective communication is a must in any CPA-client relationship. When you work to stay informed and manage client expectations, you help safeguard your firm. To that end, good documentation is critical to successfully managing client expectations. Jurors generally consider CPAs to be experts in documentation, and falling short of that expectation may be viewed as negligent and perceived as falling below the standard of care.
Below are documentation tips to help get you through tax season:
There is a new area of potential risk associated with the Corporate Transparency Act (CTA). The CTA introduces an expansive regime for entities deemed to be reporting companies to provide “beneficial owner” information to the Financial Crimes Enforcement Network (FinCEN). CPA firms should inform and advise their clients of the beneficial ownership reporting requirements under CTA.
In addition to the tax season risk management tips provided, here are a few general client management efforts to consider:
Suzanne M. Holl, CPA, is senior vice president of loss prevention services with CAMICO. With almost 30 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide CAMICO’s policyholders with information on a wide variety of loss prevention and accounting issues. She can be reached at firstname.lastname@example.org.
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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.