McGowanPRO Professional Liability Blog / Resources / Articles

Stephen Vono, Partner, NAPLIA was interviewed by Accounting Today on Trends in Malpractice Claims.  

Watch the video on the Accounting Today website.

 

Gary Sutherland, NAPLIA's CEO, was honored by the Society of Certified Insurance Counselors (CIC), a national insurance professional organization for achieving 15 years of participation.  The CIC designation requires the annual completion of advanced education and training.

The Certified Insurance Counselors (CIC) Program has been the insurance industry's premier source for practical, real-world education since 1969.

The listeners of the recent NAPLIA webinar 5 Things Every Engagement Letter Needs by Ralph Picardi asked some excellent questions.  We share those questions and Ralph's answers with you below.  Want more?  You can also watch the entire webinar.

Engagement letters sometimes include terms that limit damages to the amount of the fees paid.  Are there any limitations to the enforceability of these provisions?

The SEC prohibits the use of such provisions in public company attest engagement letters, finding that they impair independence, so they should not be used in that setting. Moreover, the AICPA has in the past taken a similar position in the context of all attest services (although has not outright prohibited the use of these provisions), so I do not recommend their use in attest engagement letters of any kind. They may be, and should be in my opinion, used in engagement letters for lower-level services, such as accounting, tax, and consulting. These provisions are not, however, always enforced by courts. Courts look at these on a case by case basis. A court is likely to let the case go to the jury to determine if the CPA firm is negligent, and if so, the amount of the damages. If the firm is found negligent, then the judge will likely compare the damages as determined by the jury with the amount permitted by the engagement letter formula. If those two amounts are relatively close, the court is likely to enforce the limitation, and if not, the court will likely disregard the limitation. Because enforcement of these provisions is very much in question, don’t be afraid to take them out if the client pushes back, as you may not be giving up very much by doing so.

Example:  If the amount of the fee paid is $10,000 and the jury comes back with a $20,000 award, the court is likely to enforce the $10,000 limitation provided by the engagement letter. If, on the other hand, the jury comes back with a $1,000,000 award, the court far less likely to limit the damages. 

 

Can engagement letters be used to market other CPA firm services?

Yes, engagement letters can be used for that purpose. It’s good practice, when discussing a prospective engagement with a new or existing client, to inform the client of the various services from which you believe the client may benefit, especially if the client is requesting lower-level services. If a client requests a lower level of service, but you think a higher level of service might better fit the client’s needs, it is advisable to discuss your concern. And if, after you have that discussion, the client still insists on the lower-level service, you should include in your engagement letter a provision that memorializes the discussion and the informed decision the client made. 

Example:  A small business client has internal control practices that are lacking; perhaps their segregation of duties is not ideal and there is a lack of management oversight. You believe that this client is at risk for employee embezzlement. The client requests only compilation services, but you think the client would benefit from an internal control review.  After a discussion of the issue, the client opts to stay with the compilation engagement. It would be wise, in that instance, to state in your engagement letter that you had the discussion, that you recommended the higher-level service, that the client understood your recommendation, and made an informed decision to forego the higher-level service. Following this course is a no-lose proposition: If you get hired to do the more invasive work, you will have higher revenues; and if not, and it turns out that there is fraud, you will have documentation that help you fend off a possible claim.

 

When including a mediation clause in an engagement letter, should the CPA firm define the location of the mediation proceedings and should we name a specific mediation firm to be used?

Yes. Mediation clauses should be very specific. Once you and your client are in a dispute, it will be very difficult to agree on anything. So, at the commencement of the engagement--when the relationship is good, which it should be when you sign the engagement letter—it is best to agree on as many things as possible. As to the location of the mediation session, have it be in your back yard (your local county) so you don’t have to travel. As to the identity of the mediator, have it be an organization that comes highly recommended by local litigators (but not your brother in law’s firm), and If you’re stumped, choose the American Arbitration Association (which is very active in mediation as well as arbitration).

 

We have a provision in our engagement letter that says the client must bring up a billing issue within 30 days of receiving the statement.  We do not specifically reference mediation but reference "mutual agreement" as the first method to resolve any billing disputes.  Is this good practice?

 It is a good idea to put a limit on the amount of time a client has to dispute an invoice, stating that beyond that limit all right to dispute is waived. If a timely dispute arises, and if you can resolve it informally – through mutual agreement - by all means do it. So, yes, the “mutual agreement” language is worthwhile.

 

 Do you or NAPLIA offer engagement letters samples?

 Yes!  Go to engagementletters.com for a library of resources from NAPLIA.

 

 

How does your state rank in the 2015 Genworth national cost of Home Care Providers, Adult Day Health Care Facilities, Assisted Living Facilities, and Nursing Homes.

Example:  Assisted living monthly cost

        USA  $3,600

        Boston  $5,300

        Your state?

 

Several of the major CPA professional liability insurance carriers have experienced an increase in claims involving both advice and planning involving pension plans and Individual retirement (IRAs) plan distributions.
Several factors are likely to have caused this increase. This article will discuss these factors and techniques that may reduce future claims.
The following factors have contributed to the increase in retirement plan claims.

• The multitude of plans available for both businesses and individuals
• The complexity of delaying the age when social security is taken advise
• The complexity in the tax code for retirement plans, particularly early withdrawal distributions
• The increase in distributions from plans as a result of taxpayers reaching retirement and the increase in distributions resulting from the sluggish economy.

In the past the traditional pension plan was either a defined benefit plan or a defined contribution plan or a combination of the two. Today here are SEPS, SARSEPS, SIMPLE PLANS, ROTHs, 401Ks, just to name a few. Clients expect and assume their CPA is knowledgeable about all plans. To further complicate matters there are both qualified and nonqualified plans. With such a large selection and that one plan fits any particular taxpayer is a daunting task for the CPA. Consequently, if the wrong plan in hind sight was selected, the CPA is sure to be blamed.

Establishing a retirement plan is seldom the responsibility of the CPA, however advice and the tax treatment of distributions, particularly early distributions is frequently deemed to be the responsibility of the CPA. Careful timing of distributions, advice regarding required minimum distributions (RMDs), and the exceptions to early withdrawal penalties have resulted in claims against CPAs.

With 10,000 baby boomers retiring each day, the CPA is often called on the advise their clients on how to prepare for their retirement.

This factor, coupled with the need for funds caused by the sluggish economy has resulted in more frequent distributions to taxpayers. It should be noted that sluggish economies have generally caused increases in claims nonetheless.

The following best practices may help in reducing the number and magnitude of claims involving retirement plans.

• Knowledge and training in this specialized area
• Consider getting a formal designation in this area
• Proper referrals to specialists in this area
• Engagement letter disclaimers
• Avoid conflicts of interest
• Disclose any compensation
• Make sure referrals to other professionals are properly vetted and carry the correct insurance polices
  
  

War Story: A CPA from the mid-west was asked to handle a large divorce settlement for a recently divorced woman. The woman retained an investment advisor but depended on the CPA to review investments and cash flow projections. The CPA created a budget and monitored expenditures on a monthly basis. Within the first year the woman was spending lavishly and had gone through about a third of her full settlement. The CPA meet several times with the woman and advisor to get her back on track to the budget, detailed notes were taken by the CPA. Unfortunately things did not change as the woman purchased several house including one for her daughter.
The CPA continued to strongly advise the woman in writing that the draining of her assets would mean she could not live out her retirement years in the manner that she wanted or planned.

To make a long story short three years after the engagement both the CPA and advisor were sued for a breach of fiduciary duty, the attorney stated that the woman was not a sophisticated business person and relied solely on the advice of her CPA and Advisor.

The good news was the CPA had detailed notes, letters and significant correspondence to aide her in the legal defense. The bad news it cost her $25,000 (her deductible) and 100’s of hours of time to help the insurance company defend this claim.

The claim settled in her favor no damages but the legal expenses were $135,000.

What could have this CPA done differently? This best course would have been to disengage after year one citing all of the salient points for the disengagement. The lawyers believe this would have allowed them to be dismissed from the case early in the proceedings.

CPAs need to be vigilant in their training and focus on CPE that directly impacts their practice profile. If the practice consists of financial planning, senior citizen clients and or a concentrated tax practice, then retirement planning should be one of the prime CPE courses.

CPAs should refer when they lack the requisite skills. The codes of conduct require CPAs to fulfil their professional responsibilities in areas where they are competent. Any lack thereof should be examined and referral may be warranted.

Last, CPAs should strongly consider engagement letter disclaimers to elevate claims in this area.
While the engagement letter serves as a device to explain the scope of services, it can also be and should be used as a device to limit scope of service. The following disclaimer can be used:

Our services are limited to preparing your income tax returns and specifically exclude any services involving retirement plan selection and or retirement plan distributions.

While claims in this specialized area are likely to continue, the knowledgeable and risk conscientious practioner may reduce their frequency and severity.

A great resource form the AICPA: The CPA's Guide to Practical Retirement Planning

I turned 60 this year and find myself looking back at the world I grew up in…….. 

Gas was 33 cents, and a fill-up for me was $1.00 

At the package store in my neighborhood there were 7 different beers, now a local beer and wine store advertises 2500 different beers available. 

At the grocery store you could pick from many different varieties of bananas, now we have just one  

Baseball tickets were $1.00 for bleacher tickets and you could easily buy them on game day. 

Movie tickets were 25 cents for Saturday matinees and when you added popcorn and a drink you were still below a $1.00. 

I was 8 years old when I saw my first color TV, back then there was only one TV, placed in the living room and I was never allowed to pick the channel having 5 older brothers 

My father’s station wagon held as many as could fit in, and there were no seat belts, the best place to sit was in the way back were you could at least stretch your legs. 

No one had bike helmets or other safety gear, it wasn’t even considered. The only time I can remember wearing a helmet was at official youth baseball game, and then you never wore one on the bases. 

Organized sports were rare, generally it was ok meet at the field at 9….depending on how many kids came, we decided on what we played. 

School milk was 3 cents, and if you were picked to collect the money…you were way cool 

There were only 3 news channels and everyone had their favorite channel, you always defended your parent’s choice… 

TV antennas were all the rage, huge rabbit ears, or if you were lucky you had an outdoor antenna, anything you could do to get better reception was great. Although my dad always complained about us messing up the antenna but moving the dial too often. 

Saturday in the fall everyone burned their leaves, and when I smell a camp fire today I am transferred back 50 years in a millisecond. 

Vacations back then were long drives, you couldn’t afford to fly with 7 kids….driving to Florida would be done over 3 days…and we memorize every stop….and we always picked up some fireworks along the way. 

One thing for sure we were not connected to the world like we are today, not saying that is bad or good, just different. 

 

The Affordable Care Act (ACA) was signed into law in 2010. One provision of the Act required that in 2014 all Americans must have qualified health insurance or face a "Shared Responsibility Payment." Additionally, the Act allowed insurance providers and large employers a one-year delay in reporting the coverage in 2014 to both the IRS and to the taxpayer. 

This change impacts your clients and their returns. Are you prepared?

NAPLIA recommends you instruct clients to complete an ACA Confirmation Letteras a standalone document separate from the tax organizer packet. This ACA Confirmation Letter specifically outlines:  

• That the ACA requires health care documentation from all taxpayer(s) and members of the household who are dependents in order to avoid the individual shared responsibility. The health care documents are required by law and must be furnished to the accountant for preparation of client tax forms.
• That in the event the taxpayer(s) does not have qualified health insurance formembers of the household who are dependents, the accountant will calculate the penalty and include it with the client return.

Because 2014 is the first year of ACA reporting requirements and the possibility exists for changes, delays and other modifications, our ACA Confirmation Letter language is drafted with respect to the available information as of January 21, 2015 and is subject to change without notice. There are several exemptions beyond the scope of this letter where the shared responsibility penalty would not be imposed. We suggest that the accountant modify the suggested language based on the profile of each accountant’s practice.

To view NAPLIA’s ACA Confirmation Letter CLICK HERE.

Recently our office broke off a long standing vendor relationship of 16 years.

I was asked the following question by one of my staff.  Why did we ever work with this unethical vendor?

The answer was that it was a good relationshp for a long time.  However, now that we are playing Monday morning quarterback, all of tell-tale signs that something was "off" were there in front of me.  

• One sided in their favor
• Taking us for granted
• Trying to undermine our business model
• Taking credit for our actions that they had nothing to do with

Other “Red Flags” were their lack of respect for their own employees, negative comments made about others and paranoia about their own presence in the marketspace.

So now I have to ask myself the question "Why did it take so long to end this relationship?"  The answer is because change is hard and difficult, and the need to factor in all the “what if’s” is time consuming.

When I did break off the relationship, I knew it was the right thing to do and I also knew that I should have done it years sooner.

Unfortunately, after the break-up things got worse.  We endured unethical and negligent behavior, improper actions and torturous interference in our business.  I can point out the actions of this vendor, but not without looking inwards at myself.

I am, by nature, an optimistic person who sees the good in people.  I don't dwell on the bad…

So what I have learned is not to ignore the “red flags” but rather to listen and act when your employees complain about the someone’s behavior.

This relates to other professional firms because I am good at giving advice to NAPLIA clients when it's time to disengage bad clients but need to remind myself to do the same.

Approaching our six month anniversary of the disengagement, I couldn’t be happier with the results. Staff morale has improved and I no longer have to defend the ex-vendor's misbehavior to others.

Last week this all hit home when I met with a new vendor and their comments were eye opening.

“We always liked your agency, but never understood your relationship with the other vendor.  To be honest caused a small shadow of doubt for us.”

PS: I have made new promises; to not avoid changes, to review relationships, to listen to my employees, and watch for “Red Flags”

We read with interest a brief article on the Robinson + Cole website that "a new version of the notorious and nasty ransomware Cryptowall, dubbed Cryptowall 4.0, has hit the scene."

Cryptowall 4.0 acts differently than its previous strategy of locking a computer entirely.  It is able to change the names of specific files so you won't be able to find them on your drive.

The primary way that Cryptowall 4.0 infects a computer is through a zipfile with an attachment that looks like a resume, though presumably the file name could be different.  So, be vigiliant about downloading files from emails, particularly from senders you don't recognize or in messages that look suspicious.

It will also be a good idea to back-up your data frequently.

Read the full article

 Recently, while attending a conference in Las Vegas, I went to one of the sessions on social media.

The tag line was:  “You are who Google says you are”

The audience was made up of some heavy users, several novices and the majority of folks like me, interested not but not always sure of the business benefits.

LinkedIn was the most talked about form of social media with 90% of the audience having a profile.

However, discussions were framed around not just using LinkedIn as an on-line business card create your profile and leave… but rather a networking group and prospective lead generator. Advance LinkedIn searches were shown and how to query to find prospects in a variety of ways.

They used several key words examples and narrowed it down to locations within 50 miles then used the industry tab to create a more focused targeted approach.

Within 30 seconds the search criteria produced valuable results that could be used as a prospecting tool. The search can be saved an exported to your CRM database system.

To wrap up the message on LinkedIn “do not be idle”

• Join groups
• Check to see what your competitors are doing
• Add content and share
• Prospect
• Add new connections

The next item on the agenda was websites and to ask the “why” questions.

Why do you want people to find your website?

In best practices all of the below would be included, but without asking the “why” question is it relevant?

• Learn who we are and what we do
• Answer common questions or concerns
• To add value to existing clients
• Wow potential clients
• Provide content or education
• Give consumers a confidence in your abilities
• Provide them with a “click bait” (an action point to generate interactive actions on behalf of the consumer)

Many websites templates look like everyone else’s, just flat static information and no call to action touch points.

Consider that the first impression of your web site happens in under 10 seconds, potential visitors will move on to the next website if you cannot answer the “why” questions.

NAPLIA is dedicated to continually adding valuable resources to our website that we share through LinkedIn.  Please visit our site often and like our company page or join one of our LinkedIn groups.   We'd love to hear from you!