By Wilhelm Dingler, JD
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Mather & Co., a division of Bollinger Inc., provides this column. For more information, contact Mather at philadelphia@bollingerinsurance.com.
Recently, I happened across an article of mine from the 1990s that listed the "Top Ten Trouble Spots for Accountants." What struck me when reviewing the list is that no matter how many times advice of caution is offered, the same troubling items continue to be the top ten problem areas from which liability claims and lawsuits arise:
-- Bookkeeping services and suggesting procedures for bookkeeping to clients. If embezzlement occurs, you are blamed.
-- Significant personal contact with a client and the performance of audit functions. Lack of objectivity can be claimed.
-- No engagement letter. An unclear "he said/she said" situation arises.
-- Lack of clarity regarding the work to be performed (a corollary to the above). Gives rise to client expectations that differ from yours.
-- Tax advice beyond area of expertise. Penalties and disallowance of structures may follow.
-- Involvement with boards or having ownership interests in an entity. Claims can arise of insider dealing and lack of objective accounting practices.
-- No internal procedures for follow-up. Deadlines are important, and "to do’s" can fall through the cracks.
-- Advising more than one party to a transaction without significant disclosures and waivers.
-- Lack of disclaimers in prepared financial statements delineating their purpose and use.
-- Failure to keep current in education and training.
One can easily recognize how the above areas can breed litigation, but there remains a disturbing and persistent disconnect between recognition and action. Take internal procedures for follow-up as an example. It is perhaps the easiest of all the points to correct, yet it is often the most overlooked. The point may seem obvious to many, but, having just undertaken for the fifth time the defense of a professional who missed a Form 706 deadline, one has to assume there is a broader failure of the task-check system. Having it on your calendar is insufficient. You need a backup.
Equally troublesome for many accountants is any combination of personal contact with clients, involvement on client boards or as part owner, and advising multiple parties to a transaction without disclosure. Many contacts are made in the course of a professional career, and sometimes the line between the personal and the professional can be blurred. Be aware of that line, and be especially wary of circumstances that can cloud objectivity. If two members of your usual country club foursome separately seek your advice regarding the tax implications to each of them regarding their upcoming joint venture, you still need conflict waivers and engagement letters. The work can still be performed, but it must be performed in the same professional manner, and with the same safeguards, that you conduct all your business endeavors.
Finally, make sure you clearly explain and detail the services to be performed, as well as those you are not to perform. Make sure you enter into a professional relationship with a blueprint that clearly establishes the expectations on both sides. Failure of expectations is a breeding ground for claims. If expectations are enumerated, a client is hard pressed to complain if you do not do something that was never contemplated in the first place.
The main point of this "Top Ten" and, in fact, all risk management advice, is to be proactive, not reactive. Expect the worst and plan for it. Practicing professionals have a 15 to 25 percent chance of being sued during the course of their career. Simple, yet effective, risk-management techniques can go a long way to placing you in the 75 percent that never gets served a summons or presented with a malpractice claim.
Wilhelm Dingler, JD, is an attorney in the professional liability department of Marshall, Dennehey, Warner, Coleman & Goggin in their Philadelphia office. He can be reached at wxdingler@mdwcg.com.
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