Diversification or dabbling? You make the call

To meet evolving marketplace and client needs, CPAs may look to diversify their service offerings and take on new opportunities as they are presented. However, every firm cannot be everything to every client and, at times, such “diversification” may be more akin to “dabbling.”

What is dabbling? Merriam-Webster defines it as “a superficial or intermittent interest, investigation, or experiment.” In professional services circles, dabbling connotes “something I know I shouldn’t be doing.” Why? Claims experience points to inexperience and inadequate training, which limits the CPA’s ability to correctly identify and address issues. Undertaking a new service or serving a client who operates in an industry unfamiliar to the CPA requires prudence. Let’s review a claim scenario to examine how diversification can turn into dabbling:

The CPA’s longtime client was growing rapidly and expanded into multiple states and opened a location in Canada. The CPA understood that there would be additional tax consequences and, therefore, took CPE and performed research to help develop their understanding of the applicable state, local, and international tax issues.

Unfortunately, when the client was audited, the auditor identified that the CPA failed to make a check-the-box election related to the Canadian subsidiary and misfiled other international tax forms. The client’s attorney engaged a larger firm to assist with the audit, which further revealed that the CPA had also missed several state filings.

Does this fact pattern highlight the CPA’s “superficial or intermittent” interest in the areas of tax applicable to this client? While the CPA may not have believed they were “dabbling,” the multitude of errors certainly points to the CPA’s superficial knowledge and the lack of technical expertise and experience necessary to deliver the services. Taking CPE and performing research to identify and address issues can help, but some areas require more than a cursory understanding.

THE NEED FOR COMPETENCE

One of the fundamental principles of the CPA profession is the standard of due care. The “Due Care” principle (ET §0.300.060) of the AICPA Code of Professional Conduct indicates that due care requires the CPA to discharge professional responsibilities “with competence and diligence.” This section also states that “competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen.” Further, a CPA’s level of competence establishes “the limitations of a member’s capabilities.” Thus, understanding the CPA firm’s strengths and being cognizant of its limitations constitute not only good risk management practices but also are required under the professional standards.

PROFESSIONAL LIABILITY IMPACT

Even if an error is not directly a result of a CPA’s lack of knowledge or experience, a plaintiff’s attorney may seek to discredit the CPA by pointing to a lack of experience or training in the area of practice or industry, thus making the defense of a claim more challenging. The plaintiff’s attorney may argue that the CPA firm went out on a limb to secure a new client or hold onto an existing one that was entering a new industry. Extensive discovery on all engagement personnel, including CPE records, may be performed to assess whether engagement team members had the right background, training, and expertise to perform the work.

MITIGATING THE RISKS

To help avoid risks associated with dabbling and to help defend an assertion that the firm lacked competence, consider the following:

Evaluate staffing

Ensure that each engagement is staffed with experienced personnel. If an engagement requires the use of team members with limited experience due to the lack of availability of experienced staff, monitor those less experienced staff to ensure that the work is competently performed.

Documentation

During planning, especially for larger, more complex engagements, document how the experience and technical knowledge required for the engagement will be addressed by the skills and capabilities of the partner, manager, and team members and that they were competent to render the services they were tasked with performing.

Training

Do not take classes simply to meet CPE licensing requirements. Consider the services you perform and complete coursework that will help improve your competence. You need to get the CPE credit, so make the training worthwhile.

Focus on your market advantage

What differentiates your firm from every other CPA firm? Often, a firm’s differentiator is not technical. For instance, maybe a member of the staff is fluent in another language or previously worked with the IRS and has an understanding of the different settlement options for delinquent taxpayers. By combining your market advantage with your firm’s core services, you can develop a unique practice niche that is better appreciated by clients and typically results in fewer errors.

Call in reinforcements, carefully

What should you do when an engagement needs expertise outside the four walls of your firm? Engaging an expert with relevant experience to assist can help mitigate this risk, but the firm must have sufficient knowledge to evaluate the expert’s work. For more on this topic, read “Working With Third-Party Experts” (Professional Liability Spotlight, JofA, Nov. 2022).

Be mindful of requests outside of your expertise

Understanding how easily dabbling can occur can help reduce the likelihood of its occurrence. With some opportunities, it’s obvious that a client request is outside your expertise and capabilities. Others are not as obvious. For example, tax practitioners may think that representing an existing client in their examination by a taxing authority is simply an extension of service. However, a CPA who proceeds without an appreciation of the examination process and its many deadlines may be seen as dabbling if an error occurs.

DEVELOPING EXPERTISE

Firms will want to accept new opportunities or develop additional capabilities. To do so, there must be a first time that a new service is rendered or a new industry is served. Certainly, this would not be considered “dabbling,” so what should a firm do when presented with an opportunity that it wants to pursue that is beyond the firm’s current knowledge and experience?

Choose your niches wisely

Selecting the industries or services in which to create or develop a niche is often a natural extension of your talents and interests. For instance, a tax professional who is passionate about the environment may create a niche in energy tax credits. Likewise, a home brewer may choose to create a niche providing client accounting services to craft breweries.

Partner with others

Consider partnering with other firms to help deliver services to your client and help you develop your competence. Your client receives service from a professional with the knowledge needed to perform the services, and you gain valuable training and insight. Partner firms can be identified from alliance networks, presenters at CPE sessions attended, state CPA societies, and word of mouth.

FINAL THOUGHTS

Dabbling is a daily challenge for CPAs. Client questions, new business opportunities, and changes in law present chances for CPAs to dabble, thus creating additional risk to their firm. Be mindful of the limits of your expertise. In addition, continuous professional development and staying abreast of industry and regulatory changes may identify areas where CPAs can develop a specialty that is both personally and financially fulfilling.

A negative trend

40%

The number of audits reviewed by the PCAOB in 2022 that will have had one or more deficiencies, up 6 percentage points from 2021.

Source: Oct. 5, 2023, remarks by PCAOB Chair Erica Williams.

Deborah K. Rood, CPA, is a risk control 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.