As busy season deadlines approach, work can feel rushed and it may be easier to make errors.
Errors or gaps in work could result in unhappy clients, or even a dispute over work product.
Deborah K. Rood, CPA, a risk control consulting director with CNA, suggested three ideas CPAs should consider to help reduce the chance of errors and ensure client expectations are met.
Use an engagement letter for every job. The best way to ensure that you and your client are on the same page on the work to be completed is by using an engagement letter that outlines what the CPA will be responsible for, what the client is responsible for, billing terms, information on extensions, and more, Rood said. As new requests may be added to your to-do list, make sure to amend your engagement letter to reflect the new work, she recommended.
In a large portion of claims, the scope of services is the major bone of contention, Rood said. Unfortunately, in about half the tax-related professional liability cases CNA handled in 2016, there was no engagement letter to refer back to describing the scope of work that was agreed to, Rood said. It's an issue Rood herself encountered when she was practicing as a CPA, she said, and she finds that larger firms may be better about using engagement letters when the job is tax-compliance related but not as good when it's something separate, such as a research project.
Examples of strong engagement letters are available to AICPA Tax Section members who have access to the Annual Tax Compliance Kit, Rood said. Professional liability insurance providers and paid providers also offer examples.
"The best engagement letter is signed by the client and the CPA firm because it represents a meeting of the minds," Rood said. There is also a unilateral or negative engagement letter that CPA firms may consider, she said. It lists all terms and conditions of the engagement and states that by sending their information to the firm, the client will be bound by the terms listed, Rood said.
"On a scale from 1 to 100 with 100 being the best, an engagement letter signed by the client and the CPA firm is 100, and a unilateral letter is 50," Rood said. "But our claim group would much rather have a unilateral engagement letter than not have an engagement letter at all."
If you don't use an engagement letter and a claim arises, the claim is likely to be more expensive in terms of what is paid out and how much it costs to defend, Rood said.
Document everything. Being with CNA for the past six years, Rood said, the No. 1 thing she has learned is the importance of documentation.
"In defense of a claim, if it's not written down, it might as well not have happened," Rood said.
Documentation includes an engagement letter. It's also a good practice to follow up any phone conversations by emailing the client with a summary of what was discussed or the outcomes of the conversation, and saving the email in the client's file, Rood said.
Any piece of client advice in an email or otherwise should follow certain standards, as laid out by tax regulatory bodies — in particular, they should follow guidelines set by AICPA Statement on Standards for Tax Services No. 7, Form and Content of Advice to Taxpayers, and Treasury Department Circular 230, Section 10.37, Requirements for Written Advice, which requires CPAs to base the advice on reasonable factual and legal assumptions, reasonably consider all relevant facts and circumstances, and apply the law to the facts. Rood recommends CPAs go beyond these requirements to include notes on anything the client should follow up on, and also state that what's being provided is not legal advice and that the CPA is not responsible for updating the advice.
A formal written memo is ideal documentation for every piece of advice a CPA provides, Rood said, but this may not be realistic.
"If I tell a CPA that they have to do that every time they talk to a client, they are going to laugh at me and say, 'How am I going to make any money?' " Rood said. "Most people would say that's not reasonable, so you need to consider the impact of the advice and client sophistication." Use formal memos on higher-impact items and with clients whose understanding of tax law is more limited.
Documentation also includes updating clients on changes to tax law, Rood said. This would include monitoring tax reform and changes to the way partnerships are audited, as new regulations take effect in 2018. Tax reform could be addressed in a newsletter to all clients. For changes to the partnership audit rules, a separate mailing, even a form email, to clients involved in partnerships would be appropriate in addition to discussing it in the engagement letter, she said.
Check your work. Reviews are always important, but they are essential during busy season, according to Rood. "Your work is more likely to result in an error or omission as deadlines approach and reviews are rushed," she said. No one is immune to mistakes, she added.
"It's April, you're reviewing a return and you're saying, 'Oh my gosh, who missed that?' And you look and you found out it was you a year ago. Why did it happen? You were rushed, exhausted, you were stressed. I think most practitioners have experienced that," said Rood, who was a practitioner for almost 20 years.
Her advice is to slow down.
"Review when you are sharpest. Take your time and avoid distractions," she said. This may mean turning off your phone or background music and shutting down email. She recommends CPAs use a review checklist — examples are available to members with access to the Tax Section of the AICPA website — and using check totals outside of your tax software to make sure that numbers agree.
She suggests sole practitioners wait a week after preparing a tax return to review it, so enough time has passed that they have forgotten the details and can review it with fresh eyes. That is assuming the client submitted the return early enough to allow that time, she conceded. "If you don't have a week, tell the client you have to extend, and communicate this as early in the process as is possible," Rood said.
Not all claims can be avoided, but certain measures can help CPAs avoid common issues during the busiest time of year, Rood said.
"By following these steps, you should reduce the likelihood of a claim."
Samiha Khanna is a freelance writer based in Durham, N.C. To comment on this article, contact Chris Baysden, senior manager of newsletters at the Association of International Certified Professional Accountants.