Professional liability Q&A: AI disclosure, retired-partner risk, and more

Sarah Ference, CPA, an author of the JofA’s Professional Liability Spotlight column, returns to the JofA podcast to discuss recent column topics and the advice CPAs can gain from them.

In the previous episode focused on Professional Liability Spotlight content, Ference detailed the January topic of risk management mantras.

The articles discussed in this episode include:

• February: “Retired Partners: A Liability Risk?”
• March: “The Risk of Providing Unintentional Financial Advice”
• April: “Should I Disclose My Use of Gen AI to Clients?”

In addition, Ference described the May column topic and several upcoming topics.

What you’ll learn from this episode:

• The importance of considering the client’s perspective related to disclosure of generative AI use.
• An explanation of the concept of apparent authority.
• Why guardrails are needed for retired partners who might still maintain an office at a firm.
• How casual conversations with clients can expose a firm to risk.
• A theme for upcoming Professional Liability Spotlight columns.

Play the episode below or read the edited transcript:

Transcript

Neil Amato: Welcome back to the Journal of Accountancy podcast. I’m Neil Amato, a news editor with the JofA. Sarah Ference is back on the show. She’s a CPA who serves as a risk control director at CNA, the underwriter of the Professional Liability Insurance Program with the AICPA. Sarah is also an author of the JofA’s Professional Liability Spotlight column, and we’re going to discuss some of those column topics today. Sarah, welcome back to the podcast.

Sarah Ference: Thanks, Neil, for having me back.

Amato: We’re glad to have you back. In our previous episode, which I will link in the show notes for this discussion, we talked about some late 2024 and early 2025 professional liability spotlight topics. This time, we’re moving ahead with the Pro Li columns from February, March, and April. Let’s start with the April topic. What is it, and what is a good summation of its key points?

Ference: Well, April’s article is on a hot topic, the use of generative AI by CPA firms, always a popular thing to write on. This article specifically explores the question that many CPA firms have: Do I have to disclose my use of AI to my clients? I won’t bury the lead here. A simple yes or no answer is not provided in the article. Unfortunately, it’s not that simple, despite what we all might want.

The article first walks through some legal and ethical considerations. Does the firm have an obligation or requirement to tell the client that they’re using generative AI? Then we talk about and discuss considerations related to the voluntary disclosure of the firm’s use of AI and what clients might expect, specifically related to protection of their data and the quality of the work product they receive from the firm. Finally, the article wraps up with a discussion of what might be included in a disclosure and consent that’s provided to and requested from the client.

Amato: I feel like a column that has the headline, “Should I disclose my use of” even anything, whether it’s AI or not, has wide interest for CPAs. But what are some of the specific dangers or risks of not disclosing the use of AI to a client?

Ference: I think to answer this question, you have to think about it from the client’s perspective. More than ever, clients want to know how their information is being used. If a client finds out after the fact that their information is being shared with an AI model or is being used to train a firm’s AI model, what does that do to the client relationship and the trust that exists between the firm and their client?

Disclosure gives the client [the] ability to make an informed decision, and then consent also gives them control over their information, which, ultimately, I think is what clients really want.

Amato: Thank you for that summary. Again, we’ll link to that column and the others mentioned in the show notes for this episode. Going back to the February edition of the JofA, the Professional Liability Spotlight column had this headline, “Retired Partners: A Liability Risk?” What’s the big deal about retired partners who might still be hanging around the office, maybe meeting a long-standing client for lunch?

Ference: To answer that question, you have to think about a risk of liability or theory of liability that many firms overlook, and it’s called apparent authority. In simple terms, apparent authority is when a party, in this case the long-standing client, had reason to believe that the retired partner still had the authority to act on behalf of the firm when, in fact, they actually didn’t.

Apparent authority has nothing to do with whether or not the retired partner actually has authority granted to it by the firm, but it has everything to do with how it appears and is perceived by the client. Going back to your question about lunch, retired partners and their former firms need to be mindful about how the client might perceive this interaction and establish some boundaries and some guardrails related to that risk.

Amato: We’ll get into some of those, maybe, guardrail guidelines, so to speak. I think there’s a lot of situations that can be envisioned where a retired partner might be back in the office. Maybe they’re mentoring someone in the firm, maybe they’re meeting for a cup of coffee, maybe they just forgot to return a key card or something else in the office after they’ve retired.

But, what are some of the guardrails that need to be established on what a partner or retired partner should or should not be allowed to do?

Ference: This is a situation that can be hard for many firms, especially if those retired partners have their name in the firm name. Many retired partners sometimes maintain an office at the firm and come in on occasion or meet with clients.

The best way to manage the risk of apparent authority is really to make a clean break, and many firms do do this, especially some of the larger ones. That means in the time leading up to retirement, having clear communication with the retiring partners’ clients and transitioning those clients to the new partners that are going to be taking over the client relationship, providing and planning in advance for this retirement such that when there is that actual retirement and the retired partner has their email and other access removed, including access to systems and office resources, then it’s not so abrupt.

Because, remember, retired partners are technically third parties to the firm and really should have no access to client information anymore. However, we know that many retirements don’t have this long glide path, and the article does provide some additional thoughts and considerations on how to manage the risk of apparent authority, especially if that transition to retirement is a little bit longer than others.

Amato: I would say for a lot of partners out there, every person’s retirement is different.

Ference: Absolutely.

Amato: There’s always going to be some intricacies that need to be worked out. Good points there.

Ference: Every firm is going to be a little bit different, too. But understanding that this risk is out there, which is often overlooked, I think, is the first step.

Amato: Yep. Moving on to the March topic, the risk of providing unintentional financial advice. How exactly does such advice get provided unwittingly?

Ference: Unintentional financial advice or really any kind of ad hoc advice can easily arise just in casual conversations with clients. I’m sure a number of our listeners out there can recall being asked for their advice on an investment or a transaction during the course of a tax planning conversation or even just during an unsolicited phone call from a client. Or even maybe as part of the tax return preparation, they are receiving quarterly brokerage statements, or they’re getting all the client’s financial information routinely, or maybe they have access to the brokerage system to be able to download statements just to make it easier from a tax-return-prep standpoint.

Getting that information may cause, in the client’s perception, the thought that the firm is actually monitoring those investments and should be alerting to the client … when an investment is maybe taking a turn or whatnot. But really managing the risk that stems from these casual conversations or other interactions is one of our greatest risk management challenges because it requires the balance of the desire to be responsive and helpful to the client with the need to not unwittingly expose the firm and your fellow partners to additional risk.

The article discusses some situations that can give rise to this higher risk of unintentional financial advice and suggests some ideas to mitigate that risk.

Amato: Is there such a thing as silence equating to giving financial advice?

Ference: That’s a good question. I think you have to look at it from the client’s perspective and what their expectations are. Then, of course, from a risk management standpoint, just err on the side of caution.

If you’re receiving bank statements, brokerage statements, then maybe include a provision in your engagement letters about the limitations of your receipt of that information. If the client is asking you directly for your thoughts on a particular transaction or investment, to politely tell them that the provision of that advice is not within the scope of your services and nicely suggest they consult with their financial adviser. This is probably the safest way to proceed.

But again, it’s just bringing it back to the awareness of how some of the activities and the actions that the firm is undertaking might be exposing the firm to additional risk, and managing the client’s expectations related to your services.

Amato: What else stands out to you about any of these topics that we’ve discussed?

Ference: I think if I had to summarize, I guess, a theme in the three articles for February, March, and April, it’s really just bringing awareness of risks that firms may not have considered that are out there.

Then we’ve got a lot of stuff, good stuff, planned for the next few months. Acquisition activity both of firms and by firms is pretty hot. We have some upcoming articles both for sellers and for buyers. For sellers, we have an article on how to handle firms’ workpapers during these transitions. For buyers, we have an article on what to consider during due diligence and how risk can arise from those transactions.

Then also, for tax practitioners out there that prepare partnership returns, we have an article on how the amalgamation or coming together of various changes and activities may be creating the perfect storm of risk related to the preparation of these types of returns. That’s what we’ve got on the horizon for the next few months.

Amato: Sarah, we appreciate this rundown on some excellent topics. Again, we’ll link to those articles in the show notes for this episode. Thank you for being back on the JofA podcast.

Ference: My pleasure, Neil. Thanks again for having me.

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.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 podcast episode provides information, rather than advice or opinion. It is accurate to the best of the speaker’s knowledge as of the publication date. This podcast episode 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.