Tell a story with your documentation

CPA Carrie Over had a new client, one who had previously self-prepared his 1040s and was ready for an upgrade. Carrie was happy to accept what she thought was another simple return but soon learned this client would not be as she expected. When the client mentioned foreign brokerage accounts during a planning call, Carrie explained that failing to report foreign bank and financial accounts on Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), could lead to significant penalties and advised the client to consult an attorney who could help devise a compliance strategy. After this initial conversation and shortly before the filing deadline, Carrie called the client for an update on the FBARs to which the client responded, “just file them.”

Subsequently, the client received notices totaling over $250,000 in penalties for the delinquently filed FBARs and sent them to Carrie, demanding payment. Carrie reminded the client of their conversation regarding the possibility of penalties and suggested the client discuss the penalties with the attorney who advised him. Carrie’s heart sank when the client replied, “I don’t remember that. What attorney?” This convenient memory lapse led to a suit against Carrie for the full amount of the penalties.

After reviewing the engagement file, Carrie’s defense counsel learned that limited documentation existed to support both the services that she had agreed to deliver and the conversations she allegedly had. Without documentation, the suit would come down to competing testimony: Carrie’s unwritten story versus the story crafted by the client’s attorney. Unfortunately, Carrie’s story did not have a happy ending, as the jury found the client’s attorney’s story far more compelling. While Carrie and her example are fictional, it resembles actual claim scenarios against CPAs in which there is a lack of supporting documentation.

Everyone loves a good story, including counsel, judges, and jurors. In the event of a professional liability claim, your documentation tells your engagement story. Like any good story, it should include a beginning, middle, and an end, and a plot that weaves those parts together clearly and logically.

TELLING A STORY THROUGH ENGAGEMENT DOCUMENTATION

The beginning

A CPA’s story starts with what services they were engaged to deliver. Confusion about or a disagreement over the scope of services is a primary driver of client disputes and professional liability claims. If what the CPA was hired to do is not clear to the CPA and client, then it is unlikely to be clear to a judge and jury. An engagement letter provides the opportunity to clearly define the scope of services. Any subsequent departures from those parameters or any additional services requested by the client should be agreed to with the client in writing to help mitigate the likelihood of a claim related to scope disputes.

The middle

After establishing the scope of the CPA’s work, the next act in the story is to perform the engagement and generate documentation to support what was actually done. In a professional liability claim, the engagement documentation will be the primary method used to evaluate whether the CPA dutifully performed the agreed-to services. If documentation is unclear or incomplete, plaintiff attorneys will leap at the chance to fill in the gaps with the story they want to tell.

Procedures or analyses performed, research conducted, judgments made, and conclusions reached will be heavily scrutinized by experts and counsel for both the plaintiff and defense. As such, engagement documentation should be clear, detailed, and sufficient to clearly connect what the firm was hired to do with what was done. This reperformance concept, while familiar to auditors, is a good guide for all services.

For example, documentation should include:

• Discussions with the client, including recommendations made or items for client follow-up;
• Relevant client records received;
• Representation letters;
• Client assertions relied upon by the CPA;
• Research performed;
• Details related to the specific procedures performed;
• Any responses to identified issues; and
• Relevant dates for the above items, as support for the timeline of certain events can be a relevant factor.

If there was reliance on third parties, such as a subject matter expert, read “Working With Third-Party Experts,” JofA, Nov. 1, 2022, for documentation and other considerations.

Just as diligent documentation can aid the defense of a professional liability claim, careless documentation can hinder it. A goal of plaintiff counsel will be to discredit your professionalism and call into question the reliability of your services. When documentation is sloppy or contains absent-minded errors, it is easier for plaintiff counsel to achieve their goal. Grammar and spelling mistakes, incomplete loops or open items, and changes to documentation after the engagement was completed can signal carelessness and diminish the perception of professionalism.

The end

The typical end of an engagement’s story is issuance of the work product or deliverable. Maintain the final version of the work product rather than drafts, as well as any documentation related to delivery of that work product. If the final work product differs from what was agreed to in the engagement letter or if the firm withdrew from the engagement without issuing a deliverable, maintain documentation to support the relevant circumstances.

OTHER DOCUMENTATION CONSIDERATIONS

Electronic communications

Given the effort exerted to create diligent documentation related to the engagement, it is easy to overlook other types of documentation, such as emails, instant messages (IMs), social media posts, and text messages, to name a few. However, documentation outside of the client’s file may be subject to discovery and is often more compelling than the engagement workpapers.

As a result, professionalism should be the standard for all types of communication, whether directed to the client or internal. Off-color remarks can paint the firm’s story in a negative light and be used to challenge the firm’s independence and objectivity. Employees in all areas of practice within the firm and in all departments should be reminded of the importance of maintaining professionalism in all communications. After all, nobody wants to see their casual text message or IM read aloud in a courtroom.

Gen AI transcription

As CPA firms venture into using transcription tools powered by generative artificial intelligence (AI), it is important to recognize the electronic documentation trail that is created by these tools. Similar to other firm documentation, transcribed recordings could be evidence in a professional liability claim.

Before turning on transcription and recording functionality, address the following in the firm’s AI use policy:

• When transcription tools should or should not be used.
  • It is likely not appropriate to turn on transcription and recording for all meetings, and intention and care should be employed.
• Responsibility to review transcriptions for accuracy.
  • Cross talk, complex sentences, or mumbled words are not always clearly reflected in generative AI transcriptions. The intent of sarcasm, humor, or otherwise casual commentary is not likely to translate into written form. Review the output for any important omitted words as well. There is a distinct difference between saying “we will not provide that service” and a transcribed note documenting “we will provide that service.”
• Retention considerations.
  • Keep final, reviewed transcriptions in the workpaper file and delete irrelevant drafts, as you would with handwritten notes or other draft documentation. This will help limit the amount of data subject to discovery.

Schedule virtual meetings via your meeting platform, so the option to record or transcribe, as well as the resulting file, resides with your firm, not the client. Finally, consult with legal counsel to determine the relevant consent requirements related to recordings and transcription in the applicable jurisdiction(s).

Oral advice

Clients will ask unexpected questions throughout the course of an engagement. It is likely that they will expect a timely response, and, as a client service professional, you may be inclined to answer them, even if the client’s question is unrelated to the engagement’s scope. Unfortunately, claims can arise from these casual, off-the-cuff conversations. A good defense? Documentation (see “Do I Really Need a New Engagement Letter for That?” JofA, Dec. 1, 2022 for more guidance.)

Kevin Hayes, CPA, is a risk control consultant at CNA. Steven M. Platau, CPA, J.D., is professor of accounting at the John H. Sykes College of Business, The University of Tampa. 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 authors’ 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.