Client accounting services (CAS) is a diverse and growing area of practice for all sizes of CPA firms. Each CAS engagement may include a variety of services with differing degrees of complexity and strategic value to the client, customized to help meet the client's individualized needs. While one CAS engagement may be transaction-focused, involving services such as bookkeeping and bill payment, another CAS engagement may involve services to support a client's strategic vision such as financial planning and budgeting. More extensive CAS engagements may involve both transactional and strategic services such that the CPA firm is involved in all or a portion of the client's accounting and finance functions. Indeed, the flexibility of CAS represents one of its primary benefits.
As with any service delivered by a CPA firm, professional liability risk exists. Given the growth and increasing demand for CAS, CPA firms should understand the risks and establish protocols to help mitigate them. Consider these claim scenarios based upon the experience of the AICPA Professional Liability Insurance Program.
CLAIM SCENARIOS INVOLVING CAS
A business decision gone wrong
A CPA was engaged to provide part-time CFO services for a staffing organization. The services included a monthly discussion of the business's operational and financial condition. During one such discussion, the client indicated a desire to expand the company and the need to draw upon the business's line of credit to do so. The line of credit was secured by accounts receivable and monitored by the lender through quarterly borrowing base certificates. The lender increased the client's line of credit, unaware that the accounts receivable balance included a number of aged and uncollectible accounts.
Fast-forward 12 months — the client overexpanded, ran short on cash, defaulted on the increased line of credit, and was forced to close. The client brought a claim against the CPA, asserting that as the company's de facto CFO, the CPA failed to alert him to the uncollectible accounts receivable and should have advised against the decision to expand.
When being helpful doesn't help
A CPA firm provided CAS to a kitchen countertop installer. The scope of services defined in the firm's engagement letter stated that the firm would perform monthly accounting services including bookkeeping, payroll and accounts receivable processing, and general ledger reconciliations. After hearing the client complain about the complexities of tax compliance, the CPA offered to prepare the client's sales tax returns using client-prepared spreadsheets containing a description of the work performed.
Several years later, a state conducted a sales-and-use-tax audit of the client at which time it was discovered that the law had changed during the period of the CPA firm's services. Due to the statutory change, the client should have charged its customers sales tax, rather than remitting use tax to vendors, as initially advised by the CPA firm. The client brought a claim against the CPA firm for the sales tax liability. While the firm's initial advice had been correct, the firm had failed to advise the client of the tax law change. Further complicating the firm's defense was its failure to enter into a separate engagement letter for sales-and-use-tax return preparation or consulting related to sales tax treatment.
Because every CAS engagement is tailored to the client's needs, every CAS claim is also unique. However, one common theme underlies each — the misalignment of expectations between the client and the CPA firm. The most common areas of differing expectations are the scope of services and the responsibilities of the client and the CPA firm relative to the engagement. Consequently, strong management of expectations in all facets of the client relationship and engagement is crucial.
The professional liability risks involved should prompt caution in the way that a firm positions its services in marketing communications, including its website. A firm should clearly identify what services it offers, while avoiding language that implies the firm's responsibilities are more than what is contemplated by the professional standards applicable to the service. For example, many CAS engagements are delivered in accordance with the AICPA Statement on Standards for Consulting Services (available at aicpa.org) whereby advice and recommendations are provided to clients for their consideration. Avoid language that indicates the firm will assume full responsibility for a client's financial operations or that financial decisions or roles will be "outsourced" to the firm. While the firm may provide high-level and strategic advice to the client, the client's governance structure does not include the firm.
As with any service, the first line of defense in a professional liability claim is to evaluate and take on only those clients you think are acceptable risks for your firm. Included in the client acceptance process is assessing whether the client understands and accepts its responsibility for the management and results of its business. What are the client's expectations of the CPA firm? Does it understand the nature of the firm's services and whether those services will suit its needs? At the end of the day, it is the client who is ultimately responsible for the success or failure of its business — not the CPA firm.
Engagement letters should define the scope of service, deliverables to be prepared by the CPA firm, the client's and CPA firm's responsibilities, and the limitations of the services. If services such as income tax return preparation or financial statement preparation will be part of the CAS engagement, separate engagement letters should be issued, as these services are subject to different professional standards.
Most CAS engagements are annuity engagements and continue until one party terminates. At a minimum, evaluate the client relationship and reissue CAS engagement letters at least annually. This protocol helps support a statute-of-limitation defense in the event that a claim arises several years down the road. In addition, revisiting the engagement letter annually provides an opportunity to confirm the scope of services, reiterate expectations and each party's responsibilities, and reinforce the value of the services provided.
Once a client is engaged, deliver services in accordance with the engagement letter. Due to the nature of CAS and the CPA's involvement with the client's business, the risk of scope creep can be higher than with other services. If additional services are required, document the revised scope and fee impact in a communication with the client.
Be mindful of word choice in both verbal and written communications with the client. The content and tone of communications should support and reinforce the responsibilities of the client and the CPA firm. For example, if the client mistakenly refers to the CPA as its CFO, does the firm diplomatically correct the error?
If the client has a decision to make, the CPA should outline, in writing, the options available and the pros and cons of each to facilitate the client's decision. If options are presented verbally, prepare a brief summary of the discussion and outline the items for the client's follow-up. Documentation, while perceived by some as time-consuming and unnecessary, supports the CPA's defense against a client's assertion that "you should have told me" or "you should have advised me."
While a CAS engagement can be a rewarding experience and mutually beneficial to the client and the CPA firm, not every client is the right fit for this service. If a client does not or will not accept responsibility for managing its business, consistently ignores the firm's advice, is unresponsive to requests, or owes the firm money, consider whether the heightened professional liability risk presented by such a client is worth it.
Sarah Beckett Ference is a risk control director at CNA. For more information about this article, contact firstname.lastname@example.org.
Continental Casualty Company, 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.