Risk management creates more soft landings

Negligence and litigation basics were introduced in Part I of this two-part series (see “Falling Hurts; So Does Litigation,” JofA, June 2024). In litigation, the plaintiff must prove everything. Defendants need only find that one ripcord that opens a functioning parachute. But parachutes do not magically appear out of thin air; you must wear one before you are sued. This article expands on Part I to show how appreciating the connection between litigation outcomes and risk management helps you proactively identify risks and avoid hard landings.

Professional liability risk management (1) accepts that errors are unavoidable; (2) acknowledges that CPAs have zero control over whether someone decides to sue; (3) has a basic understanding of strong or weak defenses to a claim; and (4) posits defense in layers. Rooted in lessons learned from years of successful and unsuccessful claim defense, risk management advice bridges the mental gap between harms you’ve never personally experienced and the assorted wheels that put those harms in motion. Harm doesn’t just come in the form of financial or reputational damage. Even if you prevail, being a defendant in a professional liability lawsuit can bring physical consequences from the added stress (e.g., anxiety attacks) — just ask someone who has been sued.

In the following scenarios, discovery revealed actions that strongly influenced the litigation result. Being cognizant of hidden harms lurking behind your actions is essential. Sound risk management may lead to better outcomes.

OUTSOURCED CAS AND CFO SERVICES

Risk management advice

If you provide client accounting services (CAS) or outsourced CFO services, avoid management responsibilities.

Litigation implications (what to avoid or protect against)

Outsourced CFO clients may view your services as more expansive than you intend, making boundaries critically important. You discuss generalities? Clients hear specifics. You have ideas? Clients see executable plans. Risk management understands how those disconnects can result in breach and damages and explains how to help avoid them.

What happened?

A CPA agreed to provide outsourced CFO services without an engagement letter. The dispute involved ownership of a process to receive compensation, which required certification that specified conditions were met. Despite their own mistakes in managing the process, the client blamed the CPA when the business failed. The CPA denied responsibility, arguing that assisting with verification was outside the engagement’s scope. But an email from the CPA stating they would coordinate the process undermined this argument. The initial damages sought exceeded $2 million. The matter was settled for mid-six figures.

Takeaways

The lack of an engagement letter made it difficult to argue precise parameters of the CPA’s duty of care. No duty? No breach. Duty? Breach and damages may follow. Distortion of the duty is a pervasive risk in services like outsourced CFO and CAS, which often have a fluid or vague scope. Moreover, if you say you will (or never establish you won’t), you create an expectation it will be done. Competently. Words have consequences, especially when documentation exists. Without the email, a jury may not have reasoned a direct line from the CPA (duty) to the botched process (breach and causation) to the failed practice (damages). When a business fails, damages mushroom. Crossing or even muddying the line between adviser and decision-maker invites arguments that you played some measurable role in that failure.

BLURRY SCOPE. CLEAR LIABILITY.

Risk management advice

Engagement letters should include a clear scope and describe each party’s responsibilities.

Litigation implications

Poorly drafted contract language creates interpretation issues. In a dispute, plaintiffs use that lack of clarity to argue that duties not envisioned were present and/or allege you negligently failed to provide agreed-upon services. Risk management alerts you to how ambiguous drafting is detrimental in litigation and suggests ways CPAs may help avoid misunderstandings.

What happened?

A CPA was engaged to provide transactional tax consulting along with a specialist hired separately by the client. Not only did the client fail to receive the anticipated benefits, but questionable advice from the specialist resulted in the loss of the entire investment. Arguably, the CPA was not responsible for the specialist’s advice. Nevertheless, the engagement letter stated the CPA would communicate any ideas or observations that could be useful to the client. The lawsuit alleged the CPA negligently failed to communicate useful observations as required by the engagement letter. The CPA never warned the client about the specialist’s advice, despite being copied on several key email exchanges discussing the transaction. The initial damages sought exceeded $10 million. The matter was settled for policy limits (seven figures), notwithstanding an argument the CPA was not the primary malefactor.

Takeaways

For any engagement, but especially consulting engagements, review your scope of services, remove your CPA hat, and ask, “Is there anything someone could reasonably argue I’m agreeing to do but I’m not actually doing?” If the answer is “yes,” refine your scope. Terms such as “any” or “all” are unambiguous. Subjective terms like “useful” or “best” can spell trouble. If your letter says “We will assist…,” where does “assistance” stop? Here, the CPA did not foresee the potential danger behind language that, as was argued, required them to know what was useful to the client and when.

DEAD MEN TELL NO TALES

Risk management advice

Write. It. Down.

Litigation implications

Attorneys on both sides evaluate the strength of evidence and arguments, either on the road to trial or the off-ramp to dispute resolution. What happens when the most indispensable person to the defense — the individual who did the work and talked to the client — is unavailable, the only one who knows what happened, or both? Your firm’s defense hinges on how adroitly the pieces of evidence can be assembled and presented to show the services delivered were consistent with what a reasonable CPA would do under the circumstances. Risk management knows that without substantiation, your defense is severely limited. An added dimension is present when you cannot even proffer an alternative to the plaintiff ’s version.

What happened?

A partner in a firm was diagnosed with major health issues in 2020, yet continued to serve clients until dying in 2023. Afterward, the firm was sued, alleging a failure to advise a taxpayer that specific actions were necessary to avoid substantial excise taxes. Emails between the deceased partner and the client generally discussing the issue were produced in discovery. Those emails, however, referred to telephone conversations, the details of which were completely unknown to the deceased’s firm. The initial damages sought approached $2 million. The matter was settled for high-six figures.

Takeaways

When a plaintiff shows all four elements of negligence, the defendant must rebut that showing. Negotiating dynamics and prospects for a successful outcome may improve drastically when written evidence supports that rebuttal. Lack of documentation makes it difficult to survive any he-said/she-said situation — markedly so when the CPA is completely unavailable. At trial, the finder of fact only evaluates the evidence admitted and reasonable inferences therefrom. Without the CPA or their account, the jury cannot hear important context about the circumstances present when the services were performed that might permit them to conclude the conduct was reasonable. Therefore, the CPA will struggle to show they met their standard of care.

IGNORANCE IS NOT BLISS — QUITE THE OPPOSITE

CPAs who have never been sued are often lulled into a false sense of security. The cliffs of negligence are fraught with risks not always obvious to the uninitiated. Risk management offers informed hints on potential litigation hazards. CPAs may not be lawyers, but they can ask themselves, “Assuming I get sued, how will my conduct be used against me?” Over time, learning to see the advantages of routinely asking this question may help you see the value in packing a good parachute before it’s too late.

Verdict awards

300%: The increase in frequency of verdicts exceeding $20 million in 2019 compared with the annual average from 2001–2010.

Source: Insurance Research Council.

J. Michael Reese, J.D., LL.M., is a risk consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

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.