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Five ways to get sued

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27th Jul 2010
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Christopher Piety outlines the top five ways accountants can make themselves vulnerable to litigation.

Mistake adherence to professional standards as a substitute for getting it right
Juries rarely care about your professional standards, rules, or disclaimers. What they care about is if you get it right. When you are preparing tax returns, or you are engaged in a review or compilation of financial statements, you are not required to verify certain types of information, but think twice. If something looks irregular, it probably is. Investigate it, document it, communicate it – and get it right.
 
Fail to communicate with clients in writing
Failing to document important information is a common mistake that often leads to lawsuits. If it is not in writing, it might be presumed later in a court of law that it didn’t happen. Juries expect accountants to document important events, advice, and client decisions.
 
Clients rarely remember that the accountant told them to stop spending beyond their means, to use the cash they have now to pay estimated tax and avoid penalties in the future, or that they shouldn’t give their bookkeeper blank cheques.
 
Documentation is needed from beginning to end. It begins with the engagement letter stating what the firm is going to do, what it’s not going to do, the limitations of the engagement, and the client’s responsibilities. Document the advice you give, the information you receive, and the decisions made by the client. Document a disengagement by sending the client a professional, objective, and rational letter that lets the client know that the engagement is ending on a specific date.
 
Participate in business deals with clients
Investing in business deals with clients is often a mistake, especially when the accountant also provides professional services to the business. Everyone is usually happy as long as the deal performs well. The accountant is perceived by the client as a competent advisor with the client’s best interests at heart.
 
If the deal falls apart or takes a severe downturn, however, the client’s perception of the accountant might change. The accountant appears to no longer have the client’s best interests at heart, and juries tend to sympathise with clients – especially with the benefit of hindsight and all the facts laid out by a skilled attorney. The accountant is portrayed as the financial expert who sacrificed the best interests of his client to benefit himself.
 
Also, disclosing a conflict of interest to the client, while helpful, doesn’t solve the problem, even if the client signs the disclosure. It can be later argued that the client’s consent was not informed by a third party, such as an attorney. Don’t get too comfortable with disclosure as a form of protection. In the end, the question is whether there is a perception that the accountant no longer has unfettered loyalty to the client.
 
Finally, and probably most importantly, is coverage precluded by your insurance policy if you enter into a business deal with a client and something goes wrong?
 
Advise both parties on a transaction or help resolve a dispute
Accountants often are asked to help clients resolve disputes - don’t do it! Friendly divorcing couples don’t always stay friendly, and guess who they blame when things don’t work out the way they had hoped? The accountant. The same is true with business disputes. Disputes between owners or partners often result in advice that is perceived by one or more of them as favouring one partner to the detriment of another. This, in turn, results in malpractice claims.
 
Sue your client for fees
This is a guaranteed cross-complaint for malpractice, and, more importantly, your insurance policy might not cover a countersuit to your suit for fees, so think twice and call your attorney or risk advisor for guidance.
 
This article was originally published on our US sister site, AccountingWEB.com. Christopher Piety is vice president of claims for CAMICO Mutual Insurance Company. He is responsible for the management, negotiation, and settlement of all claims brought against CAMICO policyholders and manages the claims department’s daily operations.
 
Reprinted with permission from the
Virginia Society of Certified Public Accountants.

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By Laurence52
27th Jul 2010 14:02

Advise both parties on a transaction

Good solid advice.

Many years ago, one of the partners of the firm I used to work for advised the two owners of a business where they had decided to go their separate ways and split the business between them.  The two owners went on their ways and at the time they were happy.

Then a year later, one of the owners decided he had paid too much so sued the other owner and our firm. And of course, our firm eventually had to pay out.  If owner A (the plaintiff) won, he would expect the firm to pay, or if owner B paid out, then B would sue us. If owner B landed up by A having to pay him, then A would expect us to pay. It was a no win situation for the firm and I realised then that it was always a high risk to advise both parties, and it is a practice I have always followed.

 

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By Albert Camus
27th Jul 2010 18:47

Good advice.

Good article and good advice. When in practice I saw most of these coming and avoided them... with one exception, suing for fees! Clients you sue for fees will always try and claim you did something wrong even if its BS and will always make complaints to your professional body. You have been warned by someone ruined by this very counter strike!

Albert Camus

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