Every accounting firm can experience an unhappy client, but not every unhappy client has a legitimate legal claim. Too often, accounting firms don’t alert the liability insurance company of potential claims for fear of rate increases. In reality, however, it is in the best interests of the accounting firm and the insurance provider to manage the risk of a lawsuit before things get more complicated.
Here is an example: Let’s say a firm advises a client to file certain tax forms before the due date, but the client didn’t understand or forgets. Later, the taxing authority assesses the client not only for the taxes owed, but also for accrued interest and penalties. The client is obviously upset and threatens to sue. Rather than checking with the insurance provider and legal counsel on the appropriate next steps, the accounting firm offers to pay the client’s tax and interest while providing representation to get the penalties waived.
The firm wants to keep the client’s business, and the partners may feel some sense of responsibility for the miscommunication. However, legally, there may not be liability or grounds for a claim. Also, the firm is not responsible for the taxes owed or the interest because the tax would be owed anyway, and the client was able to use the money tax-free for a longer period.
Can you see how things can get complicated and expensive if the firm jumps to a solution before determining true liability?
We have seen situations where firm partners accept too much responsibility and cost the firm far more than legal fees and premium increases. In fact, the fear of these costs is out of scope with the true potential costs of a lawsuit and the firm’s reputation.
However, there are some things that firms should do right away as part of their risk management process when dealing with an upset client. Wes Marston, Vice President for Member Claims at CPA Mutual, has more than 17 years of experience exploring potential accounting firm liability, and he calls these tips “CPA liability etiquette.”
1. Follow Up with the Upset Client Immediately
An unhappy client or threat can get worse if the firm delays a response to voice messages or emails. Do not jump to admitting wrongdoing. Provide a concerned response by asking the client questions or saying that you will look into the matter ASAP. Then, take the matter to your liability insurance provider to determine if there is an actual claim. Your provider can also refer you to the right legal counsel to coordinate a quick and thorough written response.
2. Ask the Right Questions
Without context or research, you won’t be prepared for an emotional confrontation. Avoid discussing the problem at length. Questions should include requesting any documentation for the matter. Stay neutral, and ask impartial questions regarding the nature of the client’s anger. When did the issue occur? Who was involved? How has it affected the client? What steps would solve the matter? Be careful with how you word questions. Use the word “issue” or “matter” rather than “error” or “problem.”
“There is a big difference between saying, ‘I’m sorry you have had this experience; we’ll look into it’” and, ‘I apologize for this error; I will fix it,’” Marston says. “This wording is important if or when you need to defend a malpractice claim.”
3. Be Factual
Gather as many facts as you can from the client and the corresponding paperwork. Then, craft a response to support a solution.
“It’s one thing to be factual, but, ‘We should have done this…’ versus ‘This is what we did…’ as a response can make a big difference later on,” Marston advises.
Focus on the facts in your response to the client, and offer realistic potential solutions with the assistance of your advisors.
4. Provide All Details to Your Advisors
Firms should be transparent when discussing the nature of the threat or claim so their advisors can fully support them in a solution. A risk management process is only as good as the facts supporting it, Marston notes.
“We don’t charge for pre-claim guidance, which does not affect the client’s deductible…and that’s standard with most major insurers,” Marston says. “What does affect the firm and its reputation long-term is an issue that gets out of control and leads to a malpractice suit. By knowing all the details, we can advise on the right communication and course of action.”
5. Liability Could Lead to Mediation Rather than Court
In some cases, there may be liability to address such as errors or omissions.
In between the fact-finding stage and a lawsuit, the parties involved can agree on mediation. If there is some liability discovered, it is often beneficial and less costly for both parties to engage in mediation and come to a settlement.
Seeking mediation for actual liability is also in the insured’s best interests. “Legal liability can impact pricing of their insurance for future years, but they often overestimate the impact that a small claim can have on their rates compared to a lawsuit,” Marston adds. “It’s only a real problem when firms try to handle things themselves, and then it blows up and they didn’t timely report it to us.”
In reality, a client may threaten to sue, but it’s more likely that the person wants a solution, an apology and even a resolution that preserves the relationship. Assume the best, and talk to your advisors as soon as possible.
Bill Thompson, CPA, helps CPAs navigate the minefield of professional liability issues that they face on a daily basis. He understands practical risk management for CPAs and risks faced in the profession. In addition to overseeing the day to day operations of the insurance company, Bill is responsible for underwriting, reinsurance negotiations and placement, coverage and policy issues, claims settlements and risk management assistance for our member firms. Bill is and has been a licensed CPA since 1981. He is a member of the American Institute of CPAs (AICPA), the Florida Institute of CPAs (FICPA), the Professional Liability Underwriting Society (PLUS), the National Risk Retention Association (NRRA), Vermont Captive Insurance Association and the Captive Insurance Companies Association (CICA). He frequently presents on topics related to liability claims and the importance of risk management.