As accountants look to offer new services beyond standard tax compliance services, many are looking at tax planning or ensuring that the tax liability for future assets is minimized. A near retiree wants to ensure that his savings are not taxed heavily, a father wants to pass down a business to a son without enduring heavy taxes, and so on. And the jump from ensuring tax compliance to planning out future tax liabilities may not seem like much of a leap.
But many financial and accounting scandals such as Enron resulted because accountants took small leaps one at a time, only to suddenly find themselves deep in uncharted waters. Tax planning may be interesting, but it represents additional professional liability risks which accountants must be aware of. A careless firm can end up providing bad service, which can result in the client turning around and suing the firm resulting in catastrophic consequences.
Consequently, accountants must seek to lower their liability risk if they intend to engage in tax planning. Here are certain factors which should be considered.
The Dangers of Moving Outside Your Expertise
Tax planning is a different service from ensuring tax compliance and as noted above, there is a risk of accountants moving into this field thinking that they happen to know enough. This can be construed as “dabbling,” where a firm dabbles into an aspect of accounting for a short period of time. But as the Ohio Society of CPAs points out, such dabbling work is high-risk compared to the work which an accounting firm normally offers.
CPAs should only undertake work which they can reasonably expect to complete competently. If an accounting firm intends to move into a new line of work, it should not be done an inch at a time. Instead, the risks of tax planning should be thoroughly studied, potential liability problems discussed, and only then should the firm jump wholeheartedly into offering the new services. If accounting was the sort of thing which anyone could dabble in, then there would be no need for accountants.
Be Careful with Referrals
This is not just a tax planning thing, but a general tip towards avoiding liability. If accountants cannot just carelessly dabble in new tax planning fields without ending up in trouble, the best thing to do is to refer your clients to professionals who can help in other fields. For example, a client may ask for a good business attorney, and the CPA may refer an attorney who they know personally but may not be familiar with their work. Since referrals are some of the most important ways for a firm to grow as Firm of the Future points out, a CPA firm may hand them out like candy in hope of getting referrals of their own in return.
That is a road towards disaster. If a CPA provides just one referral to a client and that referral ends up providing substandard work, the client may blame the CPA just as much as the referral. A CPA must do their due diligence towards any referral and provide a thorough guide to the client about what services the referral offers as well as its potential limitations. Furthermore, the CPA should also provide several alternatives as opposed to just one to give the client a greater choice of options and document everything.
Documentation, documentation, documentation
In fact, documentation is one of the most important things a CPA can do to avoid liability risk. Remember that in a “he said she said” situation between an accountant and an ordinary client, the accountant will be at a disadvantage. The judges will expect more from the accountant, and lawyers can easily spin a story about how their poor client was bamboozled by the evil financier. Even if the accountant eventually prevails in court, the costs can be devastating for the firm.
Accounting does not always have to be some official form signed and complete with a notary. Sometimes, an email will be sufficient in the case of referrals or other such information. In those cases, you must ensure adequate email server security. But the important thing is that accountants have some form of documentation so that they can show they were acting in good faith towards their clients.
Cost accountant with major focus in SAP/General Fund Enterprise Business System (GFEBS). Also, main functional inspector for accounting/finance audits for internal reviews as well as the Statement of Budgetary Resources audit initiative.