Filing seasons come and go, leaving behind exhausted but well-compensated practitioners. Well-compensated, that is, unless they're one of the many who will find themselves on the wrong end of a lawsuit alleging malpractice.
Of course, that's what professional liability insurance is for. It enables those involved in the service of accountants to sleep better at night, knowing that come what may, there's a layer of protection provided by the insurer that insulates them from the potentially harsh challenges of the profession.
Besides that cushion, though, insurers often provide risk mitigation guidance and advice to help accountants avoid getting sued in the first place. With that in mind, representatives of two of the biggest players in the accounting liability insurance market recently shared their thoughts on the risks — both old and new — that accountants face.
"Some of the biggest challenges accounting firms face today are related to adapting to new tax and regulatory changes while still meeting the growing needs of their clients and facing staffing challenges," said Alvin Fennell, vice president and senior risk advisor at Aon, the national program manager for the American Institute of CPAs' professional liability insurance program. "Firms also face the increased targeting of cyber threats in an information world without borders."
Fennell also pointed to a perennial source of problems for accountants: "Changing standards and requirements are always a new risk facing CPAs," he said. "CPAs must educate themselves on the new standard or requirement in order to meet reporting deadlines, while educating clients at the same time. An example is the Corporate Transparency Act, which requires certain information about beneficial owners. How CPAs will provide services related to the CTA remains to be seen."
New legislation and regulation always create risk, but there are other regular threats that are routinely overlooked.
"'Engagement creep' is a major risk for CPAs and often goes unnoticed and unmanaged," Fennell said. "This includes engagements growing from bookkeeping and tax and the need to review and consult as the client's needs grow over time. Lack of documentation and unspecific engagement letters lead to gray areas and misunderstanding regarding what the client's expectations are and what the CPA's role is. Another area of concern is monitoring a client's cooperation with the CPA. Are they a good client? Are they easy to work with? Is my service equal to the charge? Firms miss opportunities to review their client list for potential future risk issues."
A pandemic hangover
In terms of other new areas of risk to pay attention to, Sarah Ference, risk control director for professional services at CNA, the underwriter of the AICPA professional liability program, pointed to the issues surrounding the Employee Retention Credit.
"The IRS has up to five years to audit payroll tax returns claiming ERC, longer than the typical three-year statute of limitations for income tax returns," she explained. "Positions taken on tax returns prepared now may not be overturned until several years down the road, and the third party that performed the ERC calculator may no longer be in business. The two-year difference in statute of limitations may result in the loss of otherwise available income tax wage deductions in years closed, along with the disallowed ERC and assessment of penalties and interest on underpaid employment taxes. The CPA may be blamed for the client's losses."
Like Fennell, she stressed the importance of engagement letters in protecting an accounting firm.
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"Engagement letters memorialize a meeting of the minds," she said. "The underlying causes of many professional liability claims are often the result of some sort of misunderstanding or miscommunication between the parties. A well-written engagement letter that clearly specifies the scope and limitations of the service and each party's responsibilities can help deflect claims related to these root causes."
Accounting firms can't afford to be complacent about these kinds of risks, according to Rudy Rudolf, a senior risk advisor at Aon.
"For starters, understand that anything can happen," he warned. "I've had a lot of firms tell me that they know their clients and they would never sue them, or they haven't had a claim in 30-, 40- or 50-plus years and won't have one going forward. You can't predict the future. As a CPA, you and your colleagues have worked hard to become financially sound, so you should be taking measures to help ensure you stay that way. Having some level of insurance coverage and taking proactive measures, such as using engagement letters, keeping up with industry trends and being aware of the potential risks that may come from new innovations, technology, regulations, etc., can help you protect what you've worked so hard to build."
