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.

Is the Client Still a “Good Fit?”

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:

• Difficult or uncooperative behavior (e.g., withholding critical information, argumentative, and/or disrespectful to firm members).
• Changes in client’s business.
• Deteriorating client relationship (e.g., not taking your advice, is not responsive, acting in a way that suggests compromised integrity).
• Potential conflicts of interest.
• Constantly questioning your fees and/or requesting a discount before services commence.
• Late, slow, or partial payments.

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.

Is the Engagement a Good Fit for the Firm’s Expertise?

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.”

Are You Taking the Right Steps to Manage Client Expectations?

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:

• Engagement letters. While engagement letters won’t immunize you from lawsuits, they can be a first line of defense if a claim is made against you. Although you likely have executed engagement letters with your tax clients, those engagements that have had some engagement creep through additional services need an update to your engagement letter or a signed addendum clarifying the revised scope and limits.
• Document Significant Meetings, Communications, and Follow-Ups. Always provide written communications in circumstances that include, but are not limited to, the following:
  — Change in engagement scope (may require a new engagement letter).
  — Negative information (e.g., tax return is already late, client’s failure to timely provide information, client is facing an audit).
  — Judgment calls (e.g., aggressive tax positions taken by your predecessor).
  — Client agreement to take significant action.
  — Conversations regarding transactions, extensions, or estimated tax payments.
• “Advise” of Opportunities and “Warn” about Risks. Consider obtaining a tax representation letter or stand-alone certification letter to mitigate high-risk scenarios such as the following:
  — If your firm is preparing amended income tax returns to reflect ERC adjustments as required by taxing authorities, and the firm is not responsible for assessing or opining on the client’s eligibility for the ERC, insist that the client sign a tax representation letter in addition to having a signed engagement letter. This documentation will help protect the firm if clients later allege that the firm should have opined regarding eligibility for the credit, and/or if clients later allege the firm did not appropriately advise them of the potential risk given the extended statute of limitations afforded by the IRS for assessments.
  — For clients with known digital asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement addressing cryptoasset implications. The additional defensive documentation provides evidence of the client’s understanding and acceptance of their responsibilities regarding digital asset transactions and the limitations of the services your firm provides.

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.

• Be Factual and Professional without Personal Commentary. Unprofessional and/or inappropriate comments can damage the integrity of documentation. Ask yourself whether your documentation would be helpful or harmful if presented at trial.

Additional Tips

In addition to the tax season risk management tips provided, here are a few general client management efforts to consider:

• Fees, Billings, and Collections. Good communication with nonpaying clients is important and may spur payment. At the very least, contemporaneously memorialized communications create a defensive documentation trail that demonstrates the client, by not responding to your communications, did not have a valid basis to claim your fees are not owed. When dissatisfied with work, clients normally respond to such communications by detailing their dissatisfaction.
• Disengaging. Disengagement is an art form. Skillfully handled transitions can be mutually beneficial to firms and clients. However, care is needed when disengaging from engagements once begun. Disengaging too late and without sufficient cause may increase the likelihood a firm could face allegations of damages if the successor is unable to meet the deadline. Whether you decide to disengage a specific client, type of business, or area of practice, it is extremely important to terminate relationships professionally, formally, and in writing. At a minimum, your disengagement letter should always contain clear statements, a description of your work, and a list of any due dates or filings. When done effectively, disengagements are a good risk management tool for your firm, and knowing how to do it skillfully and professionally will help you grow your practice and avoid potential liability exposure.
• Early Reporting of Potential Claim Situations. Promptly report potential claims, including potential errors or omissions, to your liability coverage provider. Doing so protects your firm’s full policy limits, and you may benefit from tax penalty abatement services.

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 sholl@camico.com.

Sign up for PICPA's weekly professional and technical updates by completing this form.

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.