McGowanPRO Professional Liability Blog / Resources / Articles

Professional to professional referral is common practice in most industries.  A referral can provide value to the client, the referrer, and the referee.  Your client can benefit through a needed additional service, as well as, saving the time in finding an expert on their own.  Referrals can also strengthen your value by showing your interest in the client’s well being, and your connections in the industry.

However, referrals can also expand your liabilities in areas that you may not be aware.  Your liability typically does not end once you have made the referral to another professional.  Here are five things to consider when referring your client to another professional.

1. Always keep the client’s best interest in mind.  This should go without saying, but referrals should not be made on a blanket basis.  Each of your client’s scenarios are unique and referring a client to another professional for unnecessary services may decrease your standing with your client.
2. Confirm that the other professional maintains Errors & Omissions insurance.  This is important regardless of fee sharing agreements and/or indemnification clauses.  The best position is to request a formal “certificate of insurance”.  You will have a formal record, and as a certificate holder you are entitled to be notified if their insurance is cancelled, or non-renewed.
3. Disclose the relationship to your client prior to the referral, and obtain a signed disclosure statement.  This is essential if you are receiving fees, commissions, or any monetary value for the referral.  Transparency is key to maintaining your neutrality.
4. Make sure the referral fees you receive are in-line with industry standards and in relation to the amount of continued involvement on your part.  If your referral fee is higher than industry standards it implies that your role in the continued service is also greater than the industry standard.  When reasonable do not accept referral fees, but rely on good-will to your client, and return referrals as compensation for your efforts.
5. Provide at least 2 or 3 referrals in each circumstance.   Providing options to your client does not completely eliminate your liability, but it does increase the emphasis on their role in selecting the right match for their circumstances. 

The above list is not all encompassing, but it is a start for you to consider in mitigating your liability.  By implementing these items you will provide a better value, while protecting your firm and industry related partners.

These days, it is almost impossible to be in business and not collect or hold personally identifying information (PII) about your customers, employees, or business partners. If this information falls into the wrong hands, it could put these individuals at risk for identity theft.  More than 9 million Americans have identities stolen each year, and the impact to your business from a data breach could be significant. 

At least 46 states have enacted legislation requiring notification of security breaches involving personal information.

See State Security Breach Notification Laws by State

It is essential for your business to understand your potential exposure and take specific steps to mitigate your risk.  

NAPLIA's Information Security & Cyber Liability White Paper will assist you with:

• Identifying the potential exposures faced by your firm
• The development of an Information Security policy
• Understanding the insurance options available to you

Download NAPLIA's White Paper on Information Security & Cyber Liability Now.

We frequently receive questions from individuals who have been asked to, or are currently acting as, a Trustee. The most frequent question is in regards to coverage for these services under their (accountants) professional liability policy.

Although each policy form is different, it is our opinion that most accountants professional liability policies intend to provide coverage for an accountants professional services as a Trustee.

Read more about the potential exposures created by acting as a Trustee and specific Risk Management steps you can implement. 

We regularly hear from accountants who ask about the effectiveness, and enforceability, of “negative engagement letters”.

A Negative Engagement letter is one that includes wording that indicates even if the client does not sign the letter, certain action taken by the client (submission of tax returns) will be deemed as acceptance of the engagement letter terms.

We spoke with Ralph Picardi, Esq, specialists in Accountants Professional Liability, and received the following insight on negative engagement letters.

A signed engagement letter is by far the best course of action in any engagement.  By obtaining the client’s signature on an engagement letter, the firm creates a clear contract with the client including all of the important terms of the engagement.  Most firms, however, have a very difficult time receiving back completed organizers and sufficient source documentation, let alone signed engagement letters in 1040 engagements. 

To address that concern, many firms have opted for negative letters, i.e., letters that do not require a signature.  They can take many forms.  Attorney Picardi clarified that every state recognizes that contracts can be formed by something other than a signed writing.  Oral contracts and those formed by actions are examples.  In the absence of a state law requiring a signed writing (and you should check this with local counsel), the reasonableness of the communication will probably control the matter if litigation ultimately ensues. 

Attorney Picardi further recommends the following approach.  The firm should continue to style its engagement letter to be signed by the client, but should also include language that purports to make the terms of the letter binding even in the absence of a client signature.  Example language would be as follows: 

If you agree to authorize this firm to prepare your 200_ personal income tax returns pursuant to the terms set forth above, please execute this letter on the line below designated for your signature, and return the original of this executed letter to this office along with a completed copy of the enclosed tax organizer and the supporting documentation requested therein.  You should keep a copy of this fully executed letter for your records.  If this firm does not receive from you the original of this letter, in fully executed form, but receives from you a completed copy of the enclosed tax organizer and/or supporting documentation requested therein, then such receipt by this office shall be deemed to evidence your acceptance of all of the terms set forth above.  If, however, this office receives from you no response to this letter, then this office will not proceed to provide you with any professional services, and will not prepare your 200_ income tax returns.

Negative engagement letters may not be the best, but they are useful and are certainly recommended over no engagement letter at all.

For more information, visit NAPLIA's dedicated website to engagement letter education,

www.cpaengagementletters.com

If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if;

• The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country and
• The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

The IRS has announced a new 2011 Offshore Voluntary Disclosure Initiative that runs through Aug. 31, 2011. For more more information about the special the 2011 initiative, visit (2011 OVDI landing page). For questions and answers about the 2011 program, visit (FAQ page link)

Read more including sample engagement letter wording, www.naplia.com/fbar

On Nov. 22, 2010, the Internal Revenue Service sent out more than 10,000 letters to tax return preparers nationwide to remind them of their obligation to prepare accurate tax returns on behalf of their clients. The letters were sent to a pool of paid preparers who complete large volumes of tax returns with Schedules A, C or E.

During the 2011 filing season, IRS representatives will visit approximately 2,500 tax return preparers who received these letters to further discuss their responsibilities as a return preparer and to verify their compliance with existing return preparer requirements.

Read about potential exposures and response to protect yourself if you have received such a letter.

President Obama has signed into law S. 3987, the Red Flag Program Clarification Act of 2010, which exempts accounting firms and other businesses from the Federal Trade Commission's "Red Flags" rules set forth in the Fair Credit Reporting Act.

The exemption is a victory for the American Institute of CPAs and the state CPA societies that sought to relieve CPA firms of the unwarranted requirements, as CPAs are already subject to confidentiality requirements.

The text of S. 3987 can be found at:
http://www.gpo.gov/fdsys/pkg/BILLS-111s3987cps/pdf/BILLS-111s3987cps.pdf 

According to an article in the LA Times today, the economy grew at a 3.2% annual rate in the last three months of 2010, driven by stronger consumer spending and trade, the Commerce Department reports. Economists expect the recovery to pick up momentum this year, though a shadow still looms over employment.  Read full story

Despite pessimism over the impact of the economy growth on employment an analysis of professional liability applications over the past 4 years shows noticeable improvement in hiring in the Accounting industry.

Accounting professional staff counts from professional liability applications received through NAPLIA:

2006  - control

2007 - moderate growth from 2006

2008 - significant decrease from 2007

2009 - flat

2010 - significant improvement back to 2007 numbers

Although not a scientific study, employment in the Accounting industry can be measured through insurance applications.  Our experience is that the Accounting industry is seeing a recovery and we expect that employment rates in the industry will continue to rise through 2011.

“Information Security” will be a term that you begin to hear more frequently.  And, as an individual and professional, it is something you should start seriously thinking about this year.

Personal Identifiable Information (PII) has become as valuable as cash, and it is important to understand how to protect your own PII, as well as, any PII that you collect from your clients.

As an Individual

PII generally consists of any information that is unique to you and includes social security number, license number, credit card numbers, bank account numbers, and others.  Having any of this data compromised can cost you financially, as well as, a significant amount of time.  Some steps you should consider to safeguard this information include:

1. Get a free credit report.  By law, the three major credit-reporting agencies will provide you with a free copy of your credit report once every 12 months.  https://www.annualcreditreport.com/cra/index.jsp
2. Take the time to start to manage your identity.  Understand who has your information.  Your personal information can be broken down into three key areas:
   1. Financial data
   2. Medical records
   3. Public documents

As a Professional

Your professional responsibility for the protection of your client’s PII is increasing.  The Red Flag Rules were finalized in 2010 and are now law.  Even if you do not feel the Red Flag Rules technically do not apply to you by definition, it is important to understand what steps you can take to protect your client’s information

1. Identify relevant red flags.
2. Establish procedures to detect those red flags in your operations.
3. Prevent and mitigate identity theft if you spot red flags.
4. Update your program regularly.

For more information visit, http://www.naplia.com/redflags/

What to do if you have a Data Breach

Finally, what if your client data is compromised?  NAPLIA has compiled information, including links to all State Security Breach Notification laws on our website, http://www.naplia.com/resources/identity_breach.shtml

Visit NAPLIA’s Resource page for more information on topics relevant to your business.

http://www.naplia.com/resources/index.shtml