Taxes Most Perilous Area For CPAs
Tax-related claims make up more than half of professional liability actions against certified public accountants, according to a recent survey conducted by a mutual insurer.
CAMICO Mutual Insurance Company, Redwood City, Calif., reported that tax claims were the most frequent type due to the continually evolving tax code and the issues between CPAs and their clients.
Ron Klein, CAMICO vice president for claims, said the technical nature of taxation places most of the burden for decision-making on the CPA and likened it to the doctor-patient relationship. "The problem and treatment are so critical that the patient will ultimately go with the treatment the doctor recommends," he said.
CAMICO's survey of policyholders found the following practice areas to be the highest risk for liability claims: taxation, financial statements, investment fraud and embezzlement.
Mr. Klein said tax professionals must be sure of their competency and ability to render the best advice possible for the client. He cautioned about the potential for "engagement creep."
"All clients and engagements should be re-evaluated on a regular basis, at least annually, to assure the firm is capable of performing services required by the engagement and that the firm is practicing the services often enough to be proficient," Mr. Klein said.
Financial statements present the second greatest area of risk. Those involving audits, third-party creditors and occupational fraud present the most peril. "The basic issue with financial statements for third-party creditors is that the client pays for the work, but the work benefits the creditor, placing the client's interest and those of the creditor at odds with each other," he said.
Investment fraud presents the third most dangerous area when it comes to claims. "When it comes to investment advisory services, CPAs fall into trouble because they fail to perform adequate due diligence in determining the potential for investment fraud before any work is performed," Mr. Klein said.
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