Many CPAs are unaware of how their day-to-day duties can easily expose them to wrongdoing litigation. The causes of litigation are well known as well as the mitigation techniques they require to prevent these harms. Here, we are going to discuss the high risks areas and what are the mitigation techniques.
Some High-Risk Areas
Some areas of activity are prone to litigation. For example, tax planning and compliance services see a large proportion of malpractice claims, followed by audit, consulting, accounting, and bookkeeping services. Failure to implement quality control systems can lead to errors that trigger costly settlements or misconduct lawsuits in these areas.
Complaints about audit misconduct may not be common, but when they do occur, they can disrupt and damage an accounting firm’s reputation. It occurs when CPAs fail to comply with clients’ settlements or when client manipulates the wrong data.
If a CPA is performing trust-related work, it can also lead to some risks. CPAs often accept long-term client orders. They can get into trouble if the assignment puts them in conflict with third parties who believe the CPAs’ decisions have harmed them financially. For example, mismanagement of trust affairs or misuse of assets could bring the CPA and the trust beneficiary into conflict.
CPAs work hard to gather financial information from clients, analyze it to answer questions, and prepare regulatory filings and statements. So, they should be aware of any high risk that can occur at any time.
How to Mitigate those Risks?
The best way to avoid wrongdoing litigation is to exercise defensiveness. This requires a loss prevention mindset in all aspects of your practice.
Here are some valuable tips to achieve this:
Learn Clients’ Business
Understand the difference between normal and abnormal business practices in your world and stay current on your initiatives and financial results. When a customer is financially weak and entering new business areas, alarm bells should ring. In addition, you must document all customer discussions and decisions.
Non-payment Traps can Occur Often – Beware of this!
Due to the high risk of customers defaulting on counterclaims, it is best to take extrajudicial action to recover the amounts owed. If you’re not sure how to do this, it is recommended to consult an experienced debt collection attorney.
Research Clients Well
Avoid doing business with financially vulnerable customers. Those on the brink of bankruptcy are more likely to commit fraud and draw you into their crimes. Also, try to get a prospect’s process history. CPAs are more likely to sue you than those who have avoided litigation in the past.
Master Ethical Accounting Standards
Mastering the ethical standards of your profession will make it easier to avoid conflicts of interest and other bad practices that can take you to court.
For this, it is more convenient and even recommended to study the AICPA Code of Conduct. This document establishes clear lines that distinguish ethically acceptable from unacceptable behavior. Appropriate professional conduct goes a long way in immunizing you against malpractice claims.
If you are facing any issues from accounting to bookkeeping, Bit Accounting is here to help.