Seven Steps to the Litigation-Free Zone

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While CPAs and finance professionals can't control the malpractice insurance market, there is still plenty they can do to limit their liability and risk, and to protect their practices. Some cautious steps might even help to keep higher premiums at bay.

Here are some pointers from the pros:

  1. Prepare—and use—a solid engagement letter - "It's the ‘Rules of War' drawn up during peacetime," says Aon's Dave Sukert. A good engagement letter clearly defines the scope of the work, as well as the responsibilities of both accountant and client. Letters should be used for each engagement, and should be updated at least annually for longstanding assignments—sooner if there is a change or addition to the services provided. Engagement letters also play a role in insurance acceptance and rating guidelines, says Insight Insurance Services' Michelle Duffett, although many insurers won't say so directly.
  2. Exercise care in client selection - "There are bad clients out there. There are clients who are difficult to work with. There are overbearing clients. There are unreasonable clients," Duffett warns. "A lot of times, it comes down to trusting your gut instincts." Research needs to be done into not only your direct clients, but also others who work with your client, and who might lead to your involvement in third-party litigation, says Aon's Mackunis.
  3. Stick to your areas of expertise - "You shouldn't be doing work that's outside your area of capability," says Peter Sullivan, a partner in the Chicago law office of Hinshaw & Culbertson. Firms not only should have the right people, but also the right number of people to do the job properly, Duffett cautions. Firms should perform a self-evaluation before an engagement and avoid overselling to get a job. "Flowery marketing phrases like ‘the best' or ‘exceeding your expectations' will come back to haunt you when presented to a judge or jury as a rebuttal to your position that your services met industry standards," Duffett explains.
  4. Avoid fee disputes with clients - "If you sue your client for fees, you're going to get hit with a malpractice suit in return," Duffett warns. "As much as it hurts, swallow it." "Letting a fee dispute elevate to a court battle will only draw time and resources away from the firm and give an insurer an opening to raise premiums or cancel a policy based on claims history," Sullivan adds.
  5. Stay technically up to date - "These days, CPAs have to be much more cognizant of the standards and know what they're doing," says Craig Greene of McGovern & Greene. Continuing education, especially when concerned with knowing the latest accounting rules or finding out the best ways to spot fraud, is important.
  6. Avoid real or perceived conflicts of interest - Conflicts, whether actual or not, can be difficult to defend in court, according to Duffett. "Third parties have a tendency to either disown knowledge of the conflict or claim that they were unduly persuaded by the accountant's involvement," she says.
  7. Keep good internal records - Producing clear, dated documents that offer evidence of services provided and conversations with clients can help head off disputes with clients. If the dispute goes to court, those documents can help bolster the accountant's reliability and credibility.

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