CPAs are no strangers to the entrepreneurial spirit or the success associated with establishing a new business. This mindset manifests itself through the opening of new CPA firms, introduction of new service offerings, and innovation in conducting business and interacting with clients. However, growth, especially rapid growth, may bring unexpected changes to a CPA firm, which may challenge the firm's identity. Growth and other important areas of development can draw energy and focus away from quality control and consistency, creating unintended divisions or silos within the firm. Silos within a firm, whether geographic, service-related, or due to individualism, can be problematic. The actions of one silo can put the entire firm at risk. When faced with this identity crisis, a question can arise: Are we truly one firm or simply an affiliation of individual CPAs doing business as each sees fit under the same firm name?
CLAIM SCENARIO: THE ONE-WAY MIRROR
After several years at different firms, a group of CPAs came together to create their own practice. The firm experienced growth and success over many years, due in large part to its reputation for providing quality services. All was well, until the firm received a subpoena for records relating to two separate clients.
A hasty conference call between partners identified the source of the issue. Partner A had been providing compilation and tax services to Client A, a regional mirror distributor. Partner B had been providing client accounting services to Client B, a family-run mirror and glass fabrication company. Unbeknownst to either partner, Client A had targeted Client B for acquisition. Significant progress had been made on a deal between the two clients, when Client A abruptly backed out of the deal without explanation. Client B learned that the CPA firm provided services to both clients and assumed confidential information had been leaked to Client A through the CPA firm, shattering the deal. Owners of Client B had intended to retire on the sale proceeds. When another buyer was found several months later, the acquisition price was substantially less. Ultimately, Client B brought a claim against the firm for the lost proceeds.
Experts retained to assist the firm in resolving the dispute noted each partner had communicated with his or her respective client about the transaction without realizing the other party to the transaction was also a client. Neither partner considered the need to obtain a conflict-of-interest waiver because neither partner realized a potential conflict of interest could arise. It appeared that the firm administrator was the only person who had knowledge of the firm's entire client list. This weakness was embarrassingly emphasized early in the firm's existence, when two partners issued separate proposals for the same engagement.
More troubling, the engagement letter for client accounting services to Client B included a provision indicating it was firm policy to identify and communicate potential conflicts of interest and obtain a signed conflict-of-interest waiver when needed. No such provision was included in the compilation and tax engagement letters for Client A. Adding fuel to the fire, data related to the transaction for both clients were maintained in a shared folder on the firm's network with no limitations on access.
The firm's inconsistent engagement management practices and lack of communication among its partners did not present a strong basis for defense. The limited safeguards in place were unintentional and not comprehensive, only contributing to the firm's negative image in the case. Along with the settlement of the claim, the partners in the firm expended significant time, effort, and stress resolving the dispute. Moreover, the firm's reputation was tarnished.
Determined to never again suffer such a financial and reputational loss, the partners reflected on their practice and noted that a focus on firmwide collaboration, policies, and procedures could help reduce such risks in the future. After review, the firm implemented the following practices to establish a solid foundation of consistency across the firm:
Acceptance and continuance: The partners reviewed the firm's client list as a whole, noting vast differences between the individual partners. A collective decision was made to focus on specific services and industries with the highest concentration of clients and potential for profitable growth, balanced by a risk tolerance acceptable to all partners. An ideal client profile was established to guide decisions when evaluating new clients and engagements. Clients and services that no longer fit the firm's acceptable risk profile were phased out as engagements ended. In addition, approval by the managing partner was added as a required step in the acceptance process for high-fee or high-risk engagements. Finally, policies were established to address potential conflicts of interest.
Engagement letters: The firm identified the differences in engagement letters as a significant risk. A working group within the firm was established to review engagement letter provisions for each service, resolve differences, and establish engagement letter templates for each service. A standard terms-and-conditions document also was developed to reduce the likelihood that important provisions would be omitted from engagement letters or, even worse, differ across engagements, just as happened with the conflict-of-interest provision. The firm's attorney reviewed each template, including the terms-and-conditions document, to ensure enforceability in the jurisdiction.
Communication: The partners established monthly meetings to discuss business development goals, new clients, opportunities, and other firm management matters. A list of new clients also was distributed to all firm personnel monthly to help identify and manage potential conflicts of interest. This additional communication among the partners led to a team approach to obtaining and retaining clients, thus fostering firm growth.
Access: New IT policies were established restricting access to engagement files to the engagement team only. This policy helped limit the firm's exposure to the accidental disclosure of client information, of which it had been accused.
Documentation and retention: Partner A had maintained meticulous working papers and records of communication with Client A throughout the entire client relationship, while Partner B retained sparse documentation of work performed for Client B. Unable to consistently produce documents during the discovery phase of the claim, the firm decided to establish a document-retention policy with a standard retention period applicable to all engagements. The policy also addressed which documents and communications required retention.
Training: The firm established a renewed focus on firmwide consistency by developing internal training on policies and best practices at both the firm and engagement level. The curriculum was appropriately customized and deployed at every level, from staff to partner. Refresher courses were required annually.
Monitoring: While new policies and procedures would go a long way in helping protect the firm, the partners understood policies are only useful if implemented and followed. To reduce the likelihood that their hard work could be circumvented and to ensure adherence to policies, a system of quality-control monitoring and oversight was created and implemented.
SUPPORT SMART AND STRONG GROWTH
Firms in all stages of development and of all sizes can encounter problems similar to those identified in the scenario above. While the entrepreneurial spirit can be essential to the success of a CPA firm, it should not outpace the development and enhancement of policies and procedures necessary to help manage and protect the firm. Without a solid foundation, inconsistent practices can lead to more significant issues when the firm is in a high-growth mode, whether through introduction of new services, geographic expansion, mergers, or acquisitions. The enthusiasm for growth should be supported by adjusting firm management and administration practices to address the emerging challenges and enable the firm to flourish.
Daniel J. Gartland is a risk control consultant 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.
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