It is March 5, and you are actually reviewing the tax return for one of your serial procrastinator business clients. You know the type. They always bring in the information to prepare the return March 11 and demand that the tax return be filed timely.
What a relief! For once, you are not exhausted reviewing it, especially since this is the C corporation's final tax return. But what do you find? A missed opportunity on the prior year's return. You elected to forgo a net operating loss (NOL) carryback in a previous year, and this, the final year, is a loss, and the remaining NOL carryforward cannot be utilized. The client could have received a large refund if the loss was carried back, but because it was carried forward, that opportunity is now lost. You are going to have to inform your professional liability insurance carrier and the client. How could this have happened?
Many professional liability insurance claims result from services performed at the height of busy season, especially when services are provided in haste to meet a deadline. Exhaustion and stress are the main culprits, resulting in work performed under subpar conditions and rushed reviews. January through April is called busy season for a reason. What can be done? Here are several strategies for mitigating professional liability risk during busy season by moving work to earlier in this hectic period or out of it altogether.
INCENTIVIZE THE 'LAZY LATE'
The "lazy late" clients could get the CPA the information needed to provide services earlier, but it is just not a priority for them. Whether it is the partnership client that requires a monthly compilation by the 15th but does not provide a trial balance until the 12th or the individual tax client who has his or her Forms W-2 and 1099 in February but does not send the information to the CPA until April 10, these clients must be motivated to help the CPA provide quality services.
One strategy is to provide the client a discount for early delivery of information. Under the "value billing" theory, the CPA's time is worth more close to deadlines. Therefore, charging a premium for services completed immediately before a deadline is warranted if this protocol is applied consistently to the entire client base.
Another approach to the lazy-late client is to offset the added stress with a little friendly competition. For example, a CPA firm partner told the staff member responsible for managing one of these clients that he would treat the staff member to dinner at a restaurant of her choice if she could get the client's information before April. The staff member was extra-motivated and able to convince the client to get the information in early. The following year, the client heard about the challenge and even asked to be included. Suddenly, the information was in by March 15, greatly reducing the stress associated with the April 15 deadline.
The final consideration for a lazy-late client is termination. Perpetually late clients who continually take advantage of the CPA firm's time, adding undue stress and professional liability risk, may not be worthwhile.
IDENTIFY WORK THAT CAN BE PERFORMED EARLY
In a tax environment, simple tax returns may be considered low-hanging fruit that can be addressed in an expeditious manner.
In addition, most CPAs can identify clients that they know will be extended. Maybe the return cannot be finalized because the client does not receive a final Schedule K-1 until September and it is always a loss. Perhaps it is a child's tax return that cannot be finalized until the CPA knows the parent's tax bracket. Which tax bracket may only mean an immaterial difference in tax, but the child's tax return cannot be finalized until the parent's return is completed.
Once these tax returns and extensions are identified, contact the clients to encourage them to submit the information to the CPA firm early, using the strategies discussed above. Even simple returns can seem insurmountable as deadlines approach, and their early completion will reduce everyone's stress level.
One obstacle to extending returns early may be the client. Clients who know they will be extending may not feel the need to provide the information early. Or perhaps the client wants to defer paying any tax due as long as possible. In this case, it is incumbent upon the CPA to explain that any payment due with the extension can be delayed only until April 15.
REVIEW INFORMATION UPON RECEIPT
Clients are not the only ones guilty of procrastination. For example, the client's tax organizer and supporting information arrived April 1, but the CPA did not look at it until April 13 and noted that the client sold a significant piece of real estate during the year but did not provide any details. Now the CPA must call the client and ask for last-minute information, when the complex transaction could have been discussed two weeks earlier. Procrastinating thus creates unnecessary stress for both the CPA and the client. What might happen if the client cannot provide the necessary information before the due date?
If the client's information is reviewed upon receipt, open items can be requested and questions asked early. Issues may be identified at an initial stage to provide adequate time for resolution in advance of tax deadlines.
REVIEW RETURNS WITH INCOMPLETE INFORMATION
Many reviews do not take place until all information is received and the return is final and ready for filing. However, there is nothing wrong with reviewing in-process work to identify issues early. This strategy requires discipline by the CPA. It may be nice to leave the office at a reasonable hour in late March; nevertheless, an extra hour of focused time to review a return with only a few missing pieces may prevent an all-nighter in April. Issues that may be missed due to exhaustion in another three weeks may be spotted, and opportunities for the client to save money may be identified. When the final piece of information arrives, the CPA is in a much better position, needing only to review the new information and any changes since the initial review.
Consider these additional strategies to help manage workload compression:
- Include a provision in engagement letters that returns will not be completed by the due date unless information is received by a specified deadline—then stick to it.
- Do not spin your wheels. If you have an issue that seems to be taking too much time, consult with colleagues and peers.
- Consider employing independent contractors or using data scan software to assist.
- Early in the season, train newer staff to perform "tick and tie" reviews, leaving more time for senior staff to perform the strategic review.
While this column principally focuses on tax preparers, the suggested measures apply equally to CPAs who provide financial statement services. Consider performing the following procedures before year-end fieldwork begins:
- Prepare confirmations to send to vendors, attorneys, and others;
- Roll financial statements and notes forward; and
- Verify that the CPA firm has obtained documentation for any major transactions occurring between preliminary fieldwork and year end, and review the client's initial draft of the related footnote disclosure.
Finally, reduce the stress and plan a fun activity—maybe a push-up contest, office dance party, or a theme dinner hosted by the firm one night a week. Remember, busy season is stressful, but April 15 is right around the corner.
Deborah K. Rood (email@example.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 author's 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. All products and services may not be available in all states and may be subject to change without notice.