Making the right choice when no one is watching

You’ve likely experienced this situation: A client raises an idea that feels just a shade beyond the boundaries of acceptability, perhaps adopting a more aggressive revenue recognition policy or taking a tax position with questionable legitimacy. The client may not say it outright, but their implication is clear: What are the odds anyone will question this? You now face the dilemma of managing the client’s risk appetite without compromising your professional ethics — or leaving yourself vulnerable to a professional liability claim.

Decreases in IRS and SEC resources may lead clients to wonder whether pushing boundaries is less risky than when agency headcounts and budgets were higher. However, the possibility of reduced external scrutiny does not change the CPA’s professional obligations; it amplifies them. When clients think nobody is watching, the CPA’s judgment becomes an even more critical guardrail between short-term temptation and long-term consequences.

ENFORCEMENT: WHAT’S CHANGED AND WHY IT MATTERS

Recent data shows a meaningful decline in oversight agencies’ activity and resources. SEC stand-alone enforcement actions decreased 27% from FY 2024 to FY 2025, marking the lowest level in a decade, and their headcount fell about 15% over the same period. The IRS reflects similar patterns — workforce reductions of 27% along with projected further budget cuts in FY 2026 suggest constrained capacity in the near term.

These trends can create the perception — accurate or not — of reduced oversight. When clients believe nobody is watching, they may make riskier decisions. This behavior can heighten professional liability risk for CPAs. If a client’s aggressive position is later questioned, the client may allege they were not adequately advised by the CPA, and a professional liability claim could arise.

THE PSYCHOLOGY OF RISK-TAKING

Behavior seldom changes overnight. Instead, individuals and organizations can incrementally trend toward riskier decisions through documented psychological phenomena:

• Moral licensing: When a client has always played by the rules, they may feel they have “earned” the ability to take more aggressive positions, even though the absence of past scrutiny is not a predictor of the future.
• Optimism bias: Clients may interpret a perceived decline in enforcement as a durable trend, assuming decreased scrutiny will persist indefinitely. That assumption is rarely justified but can be persuasive in the moment.
• Competitive pressure: If clients believe others are exploiting gray areas, they may feel compelled to follow suit to keep up, regardless of whether their assumption is accurate.

While the potential for reduced enforcement doesn’t create these phenomena, it can intensify them, manifesting as risky behaviors including stretching materiality judgments, adopting borderline interpretations of regulations, and claiming deductions and credits despite questionable eligibility. Although risky behavior does not automatically equal noncompliance, it can increase the CPA’s professional liability exposure if the position can’t withstand later scrutiny.

PROFESSIONAL OBLIGATIONS

Regardless of enforcement trends or agency resources, a CPA’s obligations as outlined in the general standards of the AICPA Code of Professional Conduct (the code) — serving the public interest, maintaining integrity, and acting with objectivity and independence — remain unchanged. The code’s “Responsibilities” principle (ET §0.300.020) emphasizes that CPAs should “exercise sensitive professional and moral judgments in all their activities.”

CPAs are also responsible to one another for maintaining the profession’s reputation. Accountants consistently rank among the top 10 most trusted professions in Gallup’s Honesty/Ethics poll, a position that carries both privilege and responsibility. The public, lenders, boards, and other stakeholders look to CPAs as a stabilizing and steadfast force. That presumption can amplify professional liability risk if a dispute later alleges the CPA “should have known” or “should have warned the client” that the position originally taken was questionable.

HOW TO MITIGATE YOUR RISK

When temptation to adopt riskier positions increases, CPAs need strategies to help protect both their clients and themselves. The following approaches can help navigate these challenging situations in the moment and build your defense against a potential future claim.

Reaffirm your ethical obligations

Begin with educating clients about the code and other applicable professional standards for the service you’re performing. Reminding clients that “our deliverables must stand up to scrutiny at any time” is not merely a protective statement — it reflects a core obligation of the profession to exercise sound judgment.

Don’t underestimate long-term risks

Aggressive positions may appear borderline acceptable in the moment, but it’s easy to underestimate long-term exposure, such as:

• Future enforcement shifts, including retrospective review when agency priorities change.
• Due-diligence findings during financing, sale, or IPO preparation.
• Discovery by other stakeholders, such as boards, shareholders, or lenders.
• Whistleblower activity, which can increase if employees, vendors, or competitors perceive unethical behavior.
• Civil litigation, where plaintiffs’ attorneys, with the benefit of hindsight, can exploit questionable choices to paint an unflattering picture.

Moreover, the level of enforcement actions does not diminish the seriousness with which regulators pursue alleged infractions related to accounting fraud or market manipulation, the significance and long-term consequences of which often far exceed the short-term benefit of a “win.”

Advise, don’t lecture

Maintaining a calm, objective tone helps with engaging clients constructively. Difficult client conversations tend to go better when you validate their concerns, provide clear alternatives, and focus on shared goals. Consider language like: “I hear your concerns about a large tax bill this year. Let’s walk through the options available that meet the standards your board, investors, and lenders expect. We want this to hold up not only in six months but also in six years.”

Be prepared for your client to push back or question your judgment. Remember, the client is ultimately responsible for managing their business and their compliance. Your role as an adviser is to communicate the pros and cons of the potential choices, in writing.

Strengthen documentation

The best defense against tomorrow’s claim is today’s principled decision, supported by clear analysis and records. When clients consider more aggressive positions, documenting the discussion can encourage better decisions now and provide crucial context later if the position is questioned. Consider including the following in your documentation:

• The full scope of discussions, including who raised the issue.
• The risks, benefits, and potential consequences of options considered, from both a compliance and business objective perspective.
• Your recommendation and rationale, including citations to authoritative guidance.
• A reminder that the client is responsible for making their own decision on how to proceed.
• Management’s written representations, where appropriate, to memorialize their decisions and responsibilities, including the acceptance of the risks and consequences of their decision.

Apply a consistent decision-making framework

Before signing your name to any position, you may want to ask questions such as:

• Does the position comply with authoritative guidance and regulations? In tax, consider whether disclosure is required and enables you to sign the return.
• Would I be comfortable with peers reviewing this decision?
• Would this hold up to regulatory scrutiny?
• How would this be perceived in litigation?

The AICPA Ethics Hotline (888-777-7077) can also provide confidential guidance.

Consider termination

Remember: CPAs are not required to participate in risky or questionable client behavior. Withdrawing from the engagement is sometimes the most ethical — and the most protective — choice available. Reserve the right to terminate at any time, for any reason, in your engagement letters.

WHEN NOBODY IS WATCHING

Periods of reduced enforcement are not holidays from ethics; they are exams in integrity. When fewer external guardrails seem to exist, clients may be more inclined to take risks, making the CPA’s role as adviser even more critical. Upholding standards, exercising sound judgment, and documenting thoroughly remain essential to help protect your practice, the profession, and the public. Ultimately, the test of professional integrity is not how we behave when regulators are watching — it is how we act when they are not.

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IRS workforce falls dramatically

IRS workforce reductions have decreased agency headcount by 27% from the beginning of FY 2025.

Source: National Taxpayer Advocate, Annual Report to Congress, 2025.

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Kathleen Koehl, CPA, is a risk control consultant 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.