Managing liability risk in a slow economy.

• Author: Wolfe, Joseph

Historically, accounting malpractice claims activity increases when U.S. economic indicators are declining. An increasing rate of business bankruptcies, falling stock prices, and falling real estate values often precede a corresponding increase in claims activity. Given current economic conditions, what can CPA firms do to manage liability risk while operating their practices? The following are measures that CPA firms can take to manage their risk:

* Changes in Professional Standards, Regulations and Laws: With respect to both CPA firms and their clients, professional standards, regulations, and laws are constantly changing. While it is important for employees performing affected services to maintain current training on these matters, senior management of CPA firms should also review these materials promptly when they are issued and evaluate how compliance with new standards, regulations, and laws may affect their business. For example, the issuance of revised auditor independence requirements under Government Auditing Standards ("Yellow Book") has caused many CPA firms to reconsider the types of services they render for not-for-profit clients. Firms that fail to do so risk violating these rules. Additionally, malpractice claims can arise when clients face the loss of bonding, financing, or government funding when there is a delay in the issuance of an audit report because the existing auditor must resign due to independence impairments.

* Level of Service: Some services present elevated liability risk simply because there is an increased level of reliance on the CPA's work product, or the service is being requested in connection with a planned or proposed client transaction. Examples include audits and reviews, projections and forecasts (whether examined or not), business valuations, tax opinions (whether written or not), and disclosure of a client's financial information to a prospective purchaser of a client's business (even if the client has requested this disclosure and provided written consent). Oftentimes what was once a low-risk, long-term client relationship can become a high-risk situation simply as a result of a change in the services provided. When an existing client asks for new services, a CPA needs to consider whether rendering the service could result in a loss of independence or be perceived by others as presenting a conflict of interest. The CPA must also determine why the request is being made, who the intended users of...