Liability lessons on documentation, high-profile clients, CAS engagement letters

Sarah Ference, CPA, a risk control director at CNA, joins the Journal of Accountancy podcast to discuss recent topics of the JofA’s Professional Liability Spotlight column.

The conversation covers lessons learned from claims involving bankrupt clients, the importance of strong and consistent documentation, and the particular risks associated with serving high-net-worth or high-profile clients.

The episode also highlights the April column on writing effective engagement letters for client advisory services.

The articles discussed in the episode:

• January: “Don’t Let a Bankrupt Client Bankrupt You.”
• February: “Tell a Story With Your Documentation.”
• March: “Luxury Liabilities: Serving High-Net-Worth Clients.”
• April: “Tips for Writing CAS Engagement Letters.”

What you’ll learn from this episode:

• The reasons CPA firms can be drawn into litigation when clients face bankruptcy.
• How strong client acceptance and continuance practices can help firms identify and manage higher‑risk engagements before problems arise.
• Why documentation acts as a firm’s voice in a professional liability claim — and how gaps or inconsistencies can weaken defense of a claim.
• Why Ference has been told that “celebrities and CPA firms don’t mix.”
• What makes high‑net‑worth and celebrity clients higher risk and why firms should avoid relaxing standard risk management protocols for them.
• Why for engagement letters related to CAS, Ference said: “The devil is really in the details of that engagement letter.”

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Hello, Journal of Accountancy podcast listeners. This is your host, Neil Amato. Thanks for coming back for another episode of the show. Today’s discussion focuses on the Journal of Accountancy’s Professional Liability Spotlight column, some recent topics of that column, along with a look ahead to the April topic.

We’re joined once again by Sarah Ference. Sarah is a CPA who serves as a risk control director at CNA, which is the underwriter of the Professional Liability Insurance Program with the AICPA. She is also an author of this column. Sarah, welcome back.

Sarah Ference: Thank you so much for having me back once again.

Amato: Yes, looking back to our last recording, we touched on this topic briefly, but we’ll go a little deeper on it now. It was the January Professional Liability Spotlight column and the headline was, “Don’t Let a Bankrupt Client Bankrupt You.” You wrote that one, so who better to tell the readers more about it? Give us a few examples of maybe CPA firms that had clients who went bankrupt and what those examples can teach firms.

Ference: The article does go into a few different examples from our claims history. Usually, it’s a client where the firm had performed a financial statement audit and then went bankrupt and — whether it’s a bankruptcy trustee, or a surety, or a lender that lost money — brought a claim against the auditor for failing to detect that going concern issue and failing to warn the readers of the financial statements of it timely. I think regardless of the example, the lesson to learn from these examples is that the reason why a firm is sued usually sometimes has nothing to do with the firm’s actual services but everything to do with the circumstances.

No one likes to lose money. In bankruptcy, usually there are a lot of people that have lost a lot of money, and those people, whether they’re lenders, or shareholders, or bankruptcy trustees, or sureties, or others, they’re going to take steps to limit their losses, and this often includes bringing a claim against the auditor.

You may be thinking to yourself, well, aren’t those parties also responsible for performing their own credit evaluation? A bank has to evaluate the client before they make a loan. An investor should evaluate a company before they make an investment. Well, of course, those parties are responsible for performing their own evaluation, but that doesn’t stop them from suing, and the firm sometimes gets wrapped up in the middle of that.

Amato: Those are good examples, good lessons. Specifically about risk management reminders, because we touched on it some, but could you expand on what the risk management reminders are from that article?

Ference: Sure. I would first remind listeners about really a tried-and-true risk management practice, and that’s client acceptance and continuance. Because companies usually don’t go bankrupt overnight. There are usually some signs of financial difficulty or stress in advance. Identifying these potentially problematic and riskier clients early allows firms to do one of two things.

They can either terminate the client and discontinue the provision of services if they believe that the risk is too high for their firm. Or they can address the additional risk through some additional or heightened risk management procedures, which could include things like assigning more-experienced team members; staying on top of your own billing and collection so you don’t become a creditor of a bankrupt company; issuing the report timely and not giving in to client pressures to delay report issuance, which we sometimes see; and also avoiding all contact, including conversations with third parties, especially about the client and their potential financial difficulties. We don’t want to give those third parties any more ammunition to sue our firms than they would have otherwise.

Amato: That’s the January column. A reminder for people viewing this podcast page, we’ll have a link in the show notes to this column and also the others that we mention. The February column title, “Tell a Story With Your Documentation.” What does that mean exactly, and why is it important?

Ference: Well, when we analyze claims, we see patterns emerge. One of those patterns that’s present in large claims is a lack of, or deficiencies in, documentation. It’s important to remember that documentation is not just for auditors. We see documentation issues and claims related to all areas of practice, including tax and consulting. When there’s a dispute, your documentation speaks for you. It tells your story. And if documentation doesn’t exist, or if there are gaps or contradictions in documentation, a plaintiff attorney will try to fill in those gaps for you and craft the story that they want to tell, which — you know, news flash — is not going to reflect favorably on you.

Amato: What about some best practices for documentation to remind listeners?

Ference: Well, like any good story, as the title of the article for the February column alludes to, good documentation begins with a beginning and a middle and an end. Chapter 1 or the beginning of our documentation story is the engagement letter. Engagement letters should be detailed and specific and outline exactly what the firm is engaged to do. A third party should be able to read the engagement letter and know what to expect. Nothing vague, nothing ambiguous, nothing open to interpretation.

The middle part of documentation is the documentation that supports the services that were actually delivered. This is pretty easy to identify for an audit. There’s even a separate audit standard on documentation to help guide you. But it may be more difficult to determine what to include in your workpapers for other services. Consulting engagement documentation might include summaries of interviews with client personnel, narratives or documentation of walk-throughs, or a summary memo to the workpapers that describes your approach and how you arrived at the recommendations that you provided.

Documentation for a tax return preparation engagement might include the client’s tax documents and complete organizers and maybe a written summary of how certain positions were determined and supported. But regardless of services, there’s a way to document what you did.

Then finally, the conclusion to the documentation story is the deliverable itself. The last reminder I’ll share about documentation is this: to make sure all pieces of your documentation are in alignment, meaning they connect to one another. The scope of services in the engagement letter should align with the services that were delivered to support that scope. The results of the services should align to the deliverable that was issued, and the deliverable that was issued should be in line with what you said you would deliver in the engagement letter. You tie all those pieces together, just like any good story.

Amato: I think you tied that together nicely — the beginning, the middle, and the end. What are the consequences of that documentation that maybe is not in alignment or is just otherwise sloppy?

Ference: Well, I alluded to it earlier, but poor documentation makes it very difficult to defend a claim. When a claim arises and there’s no documentation, it’s going to be a battle of words between the firm and the client. Whose memory is going to be better and more believable? Unfortunately, the client and their attorney tend to win that battle. That’s why we want to make sure that documentation is present because that’s what speaks for you in the event of a claim, which often can arise several years after a service was actually delivered.

Amato: That’s the February topic. We’re moving on to March. The headline, it’s a good one, “Luxury Liabilities: Serving High-Net-Worth Clients.” What are the particular reasons that high-net-worth clients, celebrity clients require vigilance when it comes to professional liability?

Ference: Well, someone said to me that celebrities and CPA firms don’t mix, and that’s because whenever we have a claim that’s made by a celebrity or other high-profile individual or family, say it’s an athlete, or maybe a family office, it always ends up being a big one. Usually a really good, kind of fun fact pattern and interesting story, too, but always a big claim.

The dollar amounts involved are generally high, and this type of client has the wherewithal and sometimes the level of spite to pursue a lengthy claim against anyone they feel has wronged them and sometimes can do so in the court of public opinion. It just draws out a claim and makes it really long.

In addition, sometimes firms make exceptions to or bend their risk management protocols for a high-profile or high-net-worth client. Maybe they’re somehow drawn to the allure of the celebrity. Sometimes there’s not an engagement letter, or it’s vague, or it’s open-ended, or hasn’t been updated in years, or the scope of services would expand beyond what was agreed and that expansion is not documented and agreed to, or perhaps the client isn’t involved in the services at all, and the firm makes decisions on their behalf.

You put those two things together, the client type and the lax risk management protocols, put those together, and you generally have some pretty large claims that result from high-profile and high-net-worth clients. It’s just important to remember that high-net-worth clients are higher-risk and affirms risk management protocols need to be adjusted to match that elevated risk, and the article provides many suggestions on how to do so.

Amato: That’s great. We’re recording in the first quarter of 2026. We’re going to look ahead to the first article of the second quarter in April. It’s on “Tips for Writing CAS Engagement Letters,” CAS being client advisory services. How are those letters different than ones for traditional CPA engagements?

Ference: For many traditional CPA engagements, whether it’s financial statement audits or tax return preparation, what the firm does and then the work product that they issued, that’s relatively straightforward and predictable. The nature of a CAS engagement and really any other consulting engagement is going to vary based on what is agreed to by the client and the firm. That’s actually in the Statement on Standards for Consulting Services. What is the best way to document that agreement, Neil?

Amato: Uh, I’m sorry. You’ve stumped me.

Ference: I did. The engagement letter.

Amato: My listening comprehension probably sometimes could be better. So, explain.

Ference: Well, the engagement letter is where you document what you’ve agreed to with the client in terms of the scope of your services, and with a CAS engagement or consulting engagement, the devil is really in the details of that engagement letter. The April article provides suggestions on how to draft an engagement letter, including some tips on how to efficiently do so.

Amato: Yeah. Should have gotten that right, was looking over my notes and just couldn’t come up with it. The good thing is, you provided the right answer. You are the expert. I am asking the questions. It’s good I’m not normally answering them. Sarah, this has been great. Anything else you’d like to add in closing?

Ference: No, thank you so much for always inviting me back. It’s really great to be here, and I hope the listeners enjoy our podcast.

Amato: Again, that was Sarah Ference. Thanks to her for being on the show.

— 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.