Minimizing Litigation Risk for Accountants (Commentary)

Unlike attorneys, accountants are not used to looking at every situation as possible litigation. But when an accounting firm is sued, the costs in terms of time, money, reputation and headache can be enormous.

Fortunately, by keeping six simple principles of risk management in mind, accountants can avoid many situations that often result in litigation. Unfortunately, these principles can easily be overlooked in the drive to provide excellent client service.

• Remember that risk management begins when the phone rings. When a potential client calls, one’s first thought is usually of excitement. But in evaluating any new engagement, a careful accountant will consider why the client is calling. While a statement that "my old accountant’s fees are too high" might well be one reason the client is calling, it can also mean that "my old accountant is asking too many questions." A few simple questions can provide important information to guide whether to accept an engagement and how to perform that engagement.  
• Consider the scope of your engagement. While most accountants believe the engagement letter is the last word on the subject, in litigation an accountant’s proposals, emails and other documents are often claimed to expand the scope of an engagement. If the scope of your engagement changes, make sure your engagement letter changes accordingly. Also, ask whether your client intends to provide your work to third parties. Under Arkansas law, an accountant cannot be sued for negligence by a third party unless he has recognized the third party in writing. Be sure your engagement letter reflects your understanding.
• Remind yourself that your client is your client. Once you step out of your role as an accountant and into another role, such as a business partner or customer, your duties can change. Even setting aside the potential independence issues, the fiduciary duties owed by a business partner create potential liability for accountants who enter into other types of relationships with their clients.  
• Always get it and give it in writing. If something isn’t in writing, it can be argued that it didn’t happen. That great piece of advice you gave to your client over the telephone not to pursue a particular deal can disappear when your client sues you over the adverse tax consequences of the deal. Similarly, an accountant sued for failing to confirm an account that turned out to be fraudulent would rather not have to rely upon a telephone conversation for support. A follow-up letter or email documenting an oral conversation can be vitally important in preventing or succeeding in litigation.
• When necessary, go the extra mile. Accountants tend to believe that meeting professional standards is enough. But in litigation, jurors – prodded by suggestions from opposing counsel – will often apply another standard: "What could the accountant have done to prevent this?" A good rule of thumb is that if something does not seem right, look into it, regardless of whether professional standards require it. Jurors will be more sympathetic to an accountant who explored an issue, even if for some good reason he didn’t get it right, than an accountant who simply failed to look into an issue altogether.
• Protect yourself on your fees. New clients present a risk that you won’t get paid. Be leery of clients who balk at reasonable requests for retainers. Suing for unpaid fees creates all the distractions of litigation and still does not guarantee payment. More important: The vast majority of accounting malpractice claims are counterclaims against actions seeking unpaid fees. Although many of these claims are frivolous, the potential exposure from the counterclaim and the cost to defend it are often much higher than the unpaid fee at issue.  

Accountants should also know that most professional liability carriers operate under the principle that an ounce of prevention is worth a pound of cure. If your carrier has a risk management hotline, take advantage of its experience; there are few situations that your carrier has not seen before.

While following these principles of risk management won’t eliminate every lawsuit, they will decrease your risk of being sued, increase your likelihood of prevailing if you are sued, and provide you protection from the client who does not pay.

Chad Pekron is a member of the law firm of Quattlebaum Grooms Tull & Burrow PLLC of Little Rock, where he concentrates his practice on professional malpractice, complex business litigation and appellate law.