With the increasing complexities in tax law and regulations facing CPAs today, it is even more difficult to stay current on risk management and loss prevention practices. IMPACT presents the following overview of key liability areas, pitfalls and tips as a guide for tax practitioners heading into busy season.

Client Assessment/Evaluation

If the firm needs to disengage from a tax client, it’s better to do so in February than in April. Firms should evaluate all potential new clients and re-evaluate all current clients on a regular basis, at least annually.

Client evaluation enables the firm to better monitor engagements, consider any changes that might affect the professional relationship, and avoid situations that could escalate into crises. Three main considerations in the process are:

1) Is the engagement a good fit for the firm’s expertise?

The firm should be: 1) capable of performing the services required by the accepted engagements, and 2) performing the services often enough to be proficient at them. CAMICO claims experience shows that firms “dabbling” in services outside of their areas of expertise are not practicing them often enough to become proficient. Services that represent less than 15% of a firm’s service concentration produce disproportionately high loss ratios. (See chart, “Risk is High for Beginners and Dabblers.”)

2) Is the client the type of client the firm would like to represent?

CPAs should communicate with predecessor accountants and third parties to obtain as much information as possible about the client. Are the client’s expectations of CPAs reasonable? Does the client appropriately value CPAs’ services and advice?

Background investigations are recommended for all significant engagements. Consider potential or actual conflicts of interest, as well as whether the CPAs’ independence and/or objectivity are impaired in fact or appearance, especially when considering services for attest clients.
3) Is the client financially viable?
The answer to this question is critical, especially in avoiding fee collection problems and disputes. Much of the information you need can be obtained by:

   • Interviewing the client and the client’s key personnel, banker, attorney, predecessor accountants and auditors
   • Running a credit check
   • Examining the past three years of financial statements
   • Examining the past three years of tax returns
   • Examining prior CPA’s management letters

Red flags and Warning Signs

Some of the warning signs that it may be time to disengage from certain clients include:

   • Late or slow payments
   • Difficult or uncooperative behavior
   • Withheld information
   • Changes in client’s business
   • Deteriorating client relationship
   • Changes in the firm
   • Potential conflicts of interest
   • Requesting a discount before services commence

Conflicts of interest