Write it down: The importance of documenting oral advice

CPAs routinely provide oral advice to clients. While professional standards generally do not require such advice to be documented, the experience of the AICPA Professional Liability Insurance Program demonstrates that undocumented advice weakens the defense to a professional liability claim.

This real-life scenario provides an example: A CPA providing bank account reconciliation services for a law firm learned of the client’s weak controls over accounts payable—a situation that could result in vendor fraud or payments to fictitious vendors. During lunch, the CPA shared his observations and provided related recommendations to one of the law firm partners, but he provided no written follow-up. The client later discovered that the CFO had conspired with vendor employees and embezzled more than $100,000. The client sued the CPA, alleging failure to identify and disclose the control weaknesses to firm management. The CPA provided deposition testimony regarding the lunch conversation, which the partner disputed.

Here’s another example of the problems caused by a lack of documentation: A CPA prepared business and personal income tax returns for the owner of an S corporation. The client asked the CPA about the tax implications of dissolving the corporation. The CPA told the client that the distribution of the S corporation’s real property might result in a tax liability, but she did not document her discussion with the client. Later that year, the client dissolved the S corporation and had to borrow money to pay the taxes. The client sued the CPA, asserting that he would not have proceeded with the transaction had he been properly advised.

These situations underscore the importance of documenting oral advice. Clients may, in hindsight, claim reliance on advice they allege was rendered erroneously—or they may even claim the advice wasn’t given at all. Documenting oral advice provides written evidence of the content and context of the discussions that were held. It also can help mitigate client disputes and strengthen the defense of a professional liability claim.

CLIENT INQUIRIES

Accountants often give oral advice in response to client questions, whether they are general inquiries or related to specific business decisions. Requests related to specific facts and circumstances should generate written correspondence to the client. For general questions, notes to the working paper file may suffice. For example, a client may ask a general tax-related question such as which states levy individual income taxes. In this case, a note to the working paper file including the date, parties involved, and a description of the topics discussed should be adequate.

When oral advice becomes client-specific, it is best to record the discussion in a written correspondence with the client. For example, a client may ask for advice about entity formation, generating a discussion about S corporations, C corporations, partnerships, and limited liability companies. The choice of entity could significantly impact the accounting, taxation, and legal responsibilities of the company and its owners. While the practitioner’s advice to the client can be given orally, written correspondence via email or letter should follow. The following key items should be included:

• Date of the discussion and names of participants;
• Facts as provided to and known by the CPA;
• Advice provided, including recommended client actions and applicable qualifications;
• Relevant accounting and tax considerations, including technical accounting and tax guidance;
• Appropriate disclaimers, including that the recommendations are based on the limited information provided and current information and technical guidance, which are subject to change;
• Notice that no legal advice is being provided; and
• Items for client follow-up, including any additional information requested, and the need for the client to consult with legal counsel before making a decision.

UNSOLICITED ADVICE

CPAs typically have some knowledge of a client’s business operations and may provide unsolicited advice related to work flow improvements, internal controls, or recordkeeping enhancements. For general advice that has minimal impact on client operations or risk, documenting the discussion in firm working papers may suffice.

In other contexts, the CPA may provide specific observations and recommendations for client follow-up. For example, upon observing that a single person processes and pays vendor invoices, the CPA may recommend that the client segregate duties related to the review, approval, and payment of vendor invoices. Recommendations for specific actions by client management should be documented in a written communication to the client and retained in firm working papers. Documentation of such unsolicited advice can prove instrumental in defending against allegations that a CPA failed to properly advise his or her client.

SPECIAL CONSIDERATIONS FOR CONSULTING ENGAGEMENTS

The AICPA Statement on Standards for Consulting Services does not address how the results of a consulting engagement should be communicated to the client. Consulting engagements include extensive discussions between the client, CPA, and, occasionally, third parties. Services are generally performed for the use and benefit of the client, who is responsible for both making decisions and implementing plans based on the advice provided. Whenever practicable, a consultant’s findings, conclusions, and recommendations should be provided only to the client. This helps prohibit a third party from claiming reliance on that information.

Consulting engagement working papers should contain documentation of discussions held, the date, and the parties involved. Specific oral advice should be confirmed in a written report.

SPECIAL CONSIDERATIONS FOR TAX ENGAGEMENTS

Documenting oral advice provided to tax clients requires consideration of the AICPA Statements on Standards for Tax Services (SSTSs) and Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). SSTS No. 1, Tax Return Positions, and its related interpretations, and SSTS No. 7, Form and Content of Advice to Taxpayers, should be consulted with respect to both advising clients on tax return positions and rendering tax planning services. These standards and interpretations can assist practitioners in communicating with clients and determining how to best document oral advice. While SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, indicates that advice and recommendations to clients regarding corrective measures to be taken may be given orally, a CPA should consider documenting this in a written communication to the client.

Several current Circular 230 sections apply to providing oral advice to taxpayers, including Sections 10.21, 10.33, 10.34, 10.35, and 10.37. Practitioners should monitor the proposed changes to Circular 230, specifically revisions to Section 10.37, which would modify the requirements for all written advice. Although Circular 230 does not establish rules on how to document oral advice to taxpayers, the guidance contained therein should be considered when deciding if and how oral tax advice should be documented. Tax advice concerning filing obligations and applicable deadlines, penalties, and interest charges that have or may accrue due to noncompliance should be documented in writing to the client, along with the potential impact if no action is taken. 

Joseph Wolfe (specialtyriskcontrol@cna.com) is assistant vice president, risk control at CNA. Sarah Beckett Ference (sarah.ference@cna.com) is a risk control consulting director at CNA.

Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.