CPAs often find themselves woven into the complex financial affairs of their clients. And when their client’s finances dive for the worse, they usually look to their CPA to help them turn things around.
You can’t avoid every potential lawsuit, but you can take measures to minimize your risks of one. Here’s a look at some common lawsuit risks for CPA firms and how to navigate them without a court date.
- Fraud: It would be nice if CPA didn’t have to be aware of possible hustlers, fraudsters, and individuals with bad intent. No matter what the client is asking you to do at the end of the day, they will always insist that you should have known better and will file a lawsuit seeking losses against you.
- Malpractice: Your duty as a CPA is to make sure your clients pay what they owe and no more while minimizing their risk of getting an audit. This means it’s a year-round task to look for potential landmines while carrying out the bookkeeping.
- Poor Record-Keeping: Securing your client’s sensitive data and keeping it safe from cybercriminals is one of our primary responsibilities to avoid litigation. Keep your contracts clear and up to date, or it can be easily exploited by opposing counsel in court.
- Taking Sides: At first, the Mom-and-Pop business that becomes a multimillion-dollar enterprise seems like a CPA dream come true. But if the founder’s marriage collapses, CPAs must not take sides or find themselves in the middle of an expensive divorce case.
- Starting a Business with Your Client: Having a close-up view of a businesses’ books gives CPAs insider knowledge of intriguing investment opportunities. The problem is when you invest in a client’s business; you create an inherent conflict of interest.
- Deep Pockets: There’s a common perception that CPAs make big salaries and have deep pockets to pay out generous settlements. The larger the firm, the greater the target.
4 tactics to reduce litigation risk for CPAs
You can’t do business being in constant fear of litigation. The only reasonable thing you can do is reduce your risk by following best practices.
Here are four key actions CPAs can take to reduce their risk of litigation.
- Thoroughly Vet all Clients: Screen your clients carefully before you start working with them. Talk to their previous CPAs or whoever recommended them to you. Performing a background check is the first step to mitigating your risk with a new client.
- Optimize Your Engagement Letter: It’s critical that you spell out with precision the work you will perform for the client. Be sure to tweak the language to align with shifts in regulations and accounting standards if necessary.
- Document and Communicate like a Professional: Put everything in writing and make sure both you and your client understand the decisions you’re making on their behalf. If you advise your client to take a specific course of action, the written proof will be requested in court.
- Keep up with Industry Training: Like any professional, CPAs need to take continuing education courses to stay on top of the latest changes in regulations and technology. A court could find you negligent for not living up to these professional obligations.
You should also retain counsel that will aggressively defend you against frivolous lawsuits.
Get insured to protect against CPA lawsuits
No matter how closely you follow best practices, an aggrieved client can force you to waste valuable time and resources defending yourself in court. You also can’t keep an eye on every employee at all times, nor control the actions of third parties who turn out to be poor business partners.
McGowanPRO’s Professional Liability Insurance provides comprehensive liability coverage tailored to the unique needs and risks of CPAs. Find out how it can protect you or your firm from the potentially devastating costs of a CPA lawsuit.