Navigating storms, and risk, with subcontractors.

Author:Mitzen, Matt
 
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Like any good sea captain, many CPA firms run a tight ship, ensuring staff are appropriately utilized and busy delivering client service. While this staffing model makes sense most of the year, there are times when not having enough hands on deck may sink the ship. To keep the boat afloat, firms often engage outside help to assist during stormier times, such as tax season, or to provide expertise that does not otherwise reside within the firm, such as engagement quality control review (EQCR) services. While using subcontractors has the advantage of just-in-time staffing, there are professional liability risks to consider.

An example of such a risk is shown in the following claim scenario:

A CPA firm engaged a subcontractor who was winding down his own tax practice to assist with the firm's April 15 tax deadline. Unbeknownst to the firm, the subcontractor also provided bill payment services on behalf of his legacy clients. In addition, he started providing these services for the firm's clients assigned to him, without its knowledge. After April 15, the subcontractor's services for the firm ended, but the firm did not inform its clients of the termination. The subcontractor continued to make payments on the clients' behalf. The firm only realized this when it was sued by a client for the subcontractor's embezzlement of over $3 million from the client. The client asserted that it believed the subcontractor was still acting on behalf of the firm and that the firm failed to supervise the actions of its "agent." As the story demonstrates, the actions of a firm's subcontractors, even though they are unrelated third parties of a CPA firm, can place the firm at risk. Consider implementing the tips below to mitigate the risk of a claim related to subcontractors.

BATTEN DOWN THE HATCHES

Before setting sail, revisit your needs. Are you looking for additional crew to prepare income tax returns during March and April, or are you looking for someone with specific talents, such as international or state and local tax expertise?

Irrespective of the role a subcontractor will play, perform due diligence to evaluate the subcontractor just as you would a new employee. Is the subcontractor qualified in the required areas? Can the subcontractor perform the required functions? Consider a busy CPA who hastily engaged a subcontractor on a Friday afternoon in late February to help prepare international aspects of corporate tax returns, prior to completing due...

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