There are roughly 1.5 million accountants and auditors in the United States, according to the Bureau of Labor Statistics, and about half of that number are licensed CPAs. In New York alone, there are more than 100,000.
And since we’re talking big numbers, there are also a multitude of reasons why a CPA can get sued. In fact, too many to list here. Instead, we’ll focus on 4 ways not to get sued in your practice:
1. Do What You Know Best.
An African proverb says, “A wise man never knows all, only fools know everything.” Translation: don’t be all things to all people and don’t practice outside of your license and area of expertise. You don’t offer oil changes or gift-wrapping, do you? So why provide a service for a client that is not within your boundaries as a CPA?
In my practice, I have encountered a number of clients who want to sue their former CPA who formed a company on their behalf. This typically happens when there are two or more founders and while the entity is legally formed, no consideration as to shareholders’ agreements or operating agreements – as the case may be – was given. This leaves the business in a lurch when one or more founders wants to leave, or sell, or dies, or any number of bad events happen. I’ve had clients want to sue their CPA for setting them up with standard templates and failing to protect their interests at business formation. In addition, ownership of the entity’s intellectual property must properly document the chain of custody, make certain that the owners are bound to the company, and a host of other requirements. Corporate formation is not as simple as filing documents with the state. And some CPAs aren’t familiar with New York’s specific requirements for naming, ownership structure, and formation.
For example, an Ohio court determined that an accountant had engaged in the unauthorized practice of law by drafting documents to create a business entity for his clients. The court recognized that “there are many issues in choosing a business structure, which ordinarily requires a significant amount of legal judgment in addition to other considerations.” And a New York court found a certified public accountant in contempt, imposed fines, and enjoined his unauthorized practice of law, for undertaking to answer a client's tax law questions.
You don’t know what you don’t know. In my own practice of law, I always advise clients to seek tax advice from a qualified tax professional such as a CPA or a tax attorney.
2. Don’t Get Bullied.
As a licensed professional, a CPA must fulfill obligations to the profession and not accede to client demands that he or she knows are contrary or are skating close to or over the edge.
For instance, in another case, a long-time client asked his CPA for a verification letter to get a loan. The CPA was hesitant because he hadn’t never verified his client's business financials and relied only on the client’s figures. The client threatened to pull his business if the CPA didn’t comply, so the letter was written. However, the client’s business was in trouble and the owner defaulted on the loan. Who did the bank sue? The CPA for negligent misrepresentation.
3. Fire Clients Who Ignores Your Advice.
“I told you so” is not an iron-clad defense. Just because a CPA provides the proper advice doesn’t mean the client heeds it. And when things go south, they will be looking for someone to blame. And that person might be you. For example, in another case, a CPA also recommended that the company pay for audited financial statements prior to an upcoming transaction due to some questions he had. The board determined the audit would be too expensive. When evidence of fraud was subsequently found, the CPA was sued because the board believed his prior work should have caught the problem.
4. Don’t Get into a Side Business with a Client.
Another way to get sued is by getting into side business deals with clients. A CPA had two long-time clients who wanted to invest in real estate. Ultimately, the three joined forces to buy an office building. But when the building's largest tenant went bankrupt, so did the partnership. The clients sued the CPA for conflict of interest and negligent investment advice, among other claims.
Nine times out of 10, investing in business deals with clients is a mistake, especially when the CPA also provides professional services to the business. Like in the example above, everyone is happy when the deal performs well, but if the deal falls apart or takes a downturn, the client's perception of the CPA may change. Further, disclosing a conflict of interest to the client, while required, doesn't solve the problem—even when the client signs the disclosure. The client can claim that their consent wasn’t “informed” by a third party (an attorney). Finally, check if your insurance policy covers entering a business deal with a client and something goes wrong.
What to Do?
CPAs must comply with the AICPA Code of Professional Conduct. These are guidance and rules for all AICPA members as to the performance of their professional responsibilities. Remember this list of 4 ways not to get sued, and work with an experienced New York small business attorney to help protect your practice. If we can ever be a small part of your success story, do not hesitate to reach out to us!
Bonus Tip 1 – Do Not Lose Your Clients Data.
Cybersecurity is a must. A CPA has information people won’t discuss. We all seem happy to talk about the intimate details of our personal lives freely on social media, but we NEVER discuss money, except to brag. Read our first newsletter for more on how to protect your client’s data and not become an ugly statistic.
Bonus Tip 2 – Always Use An Engagement Letter.
As I shared in last month’s newsletter, a signed engagement letter is essential for your practice. Literally the first thing a professional malpractice claims examiner will ask for is the client engagement letter. Don’t get off on the wrong foot by not having one in each and every instance.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.