By Wilhelm Dingler, JD
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Bollinger Inc. provides this column. For more information, contact Bollinger at robert.connolly@bollingerinsurance.com.
CPAs are well aware of the scandals and litigation of the recent past in which overly aggressive accountants have been ensnared. Today, the subprime mortgage crisis is making headlines and, in the usual efforts to ascribe blame, it should come as no surprise that many are looking to finger accountants for the mess.
At the heart of this is FAS No. 140 and the recently updated FAS No. 157. The changes to FAS 157 - which took effect in November 2007 - were designed to add transparency to financial reporting and the treatment of certain assets. In particular, the standard attempted to settle the long-standing debate over "cost" versus "market" in the valuation of assets for financial reporting purposes. FAS 140, on the other hand, was designed to allow financial institutions to treat assets held in various securities as sales or secured financing. This sometimes allowed transactions to be taken "off balance sheet," thus defeating the goal of transparency. It is in this context that the debate over blame finds its genesis.
It seems that no matter how many times one places "... is the representation of management" on a financial statement, people still want to believe the accountants or the accounting/financial reporting rules are to blame when some reckless deal comes apart at the seams.
This should serve to emphasize the primary maxim for accountants: consistently and religiously document your files with the actions you take. Note the reasons for your actions and, where available, cite guidelines, rules, Treasury regulations, FASB pronouncements, and the like. Like a baseball manager, rarely is an accountant immune from multiple layers of second guessing. Likewise, it is rare that one can avoid litigation borne of the second guessing. Statistically, economic downturns parallel a distinct rise in litigation.1 That means someone might be looking to you to fill the gap in their economic expectations.
The best way to protect yourself is to be armed with evidence of the reasons for actions recommended. For tax practitioners, for example, positions that should be documented include unusual, aggressive, or out-of-the-ordinary tax positions or if the practitioner believes new standards, as found in Section 6694(a)(2)(B) of the IRC of 1986, are implicated. When it comes to auditors, valuing an asset on the basis of "cost" versus "market" is one example where the thought process and reasoning of one approach over the other should be set down.
Often, several approaches are both justifiable and supportable, but an accountant may not be able to point to specific evidence as to the reasons for the action they chose. Thoughtful and detailed documentation of the actions will help provide a defensible position. This is particularly true if the documentation is made contemporaneous with the advice or action taken, rather than trying to remember later on.
Accountants are kiddingly referred to as "belt and suspenders" professionals when taking action on behalf of a client. Yet, when it comes to their documentation to safeguard their livelihood, many accountants are found to be wanting. Protect yourself and the reputation of the profession by documenting your file. There is no such thing as excessive documentation.
1 See "Economic Downturn Means More Malpractice Claims against Attorneys and Firms," Of Counsel, Vol. 20, No. 8 (2001); European Journal of Law & Economics, Vol. 9, No. 3 (May, 2000); "Trade Secrets Litigation to Rise as Economy Dips," Portfolio Media, Feb. 13, 2008.
Wilhelm Dingler, JD, is an attorney in the professional liability department of Marshall, Dennehey, Warner, Coleman & Goggin in Philadelphia. He can be reached at wxdingler@mdwcg.com.
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