The successful expansion of many accounting practices during the pandemic has set them up for liability risks in the year ahead.
“One of the things that stands out is just how resilient the accounting profession has been and how amazing it’s been to work with them, and the impact they had in aiding their clients,” said Ken Mackunis, executive vice president with Aon Insurance Services. “When they expanded their services in response to their clients’ needs as a result of the CARES Act, they stretched into a broader role for CPAs. We’re seeing firms thrive and grow. At the same time, we’re seeing that they did a good job of client selection and client retention. That’s where risk starts, with growth and expansion of the breadth of services. That’s a positive backdrop of how we’re looking at risk into 2022.”
“It’s always good business to reevaluate the circumstances of current clients,” he said. “If a firm is into evaluating client continuance — and they should be — we will see a lot of that going into next year. “
The biggest risk is in the cyber area, according to Mackunis. “It keeps growing and growing, to the extent that the insurance market is getting nervous about how they’re handling it. In fact, they’re nervous about how they’re handling it themselves. The frequency of events has grown overall, and that will resonate into the accounting profession because the CPA works so much with personal and confidential information,” he said.
“This is a very real issue,” agreed Stephen Vono, senior vice president of McGowanPro. “If you don’t have cyber insurance, you should get it now, because it may be harder in the next few months.”
“Cyber claims are continuing to increase. The crooks are getting way better at causing harm,” he said. “The large companies are pouring resources into this, and assuming that the large companies are getting better at protecting themselves, what will happen is the smaller companies will become easier targets for the criminal. I’ve talked to sole practitioners who think they’re immune because they’re small. The answer is, they’ll come after you because you’re low-hanging fruit. Everyone needs to tighten up their cyber liability protections.”
Managing risks
Risk control is more important than finding the right type of insurance, according to Mackunis. “Even with insurance, the insurance company will be looking for more controls in place around managing exposure,” he said. “For example, what the firm is doing to prepare for ransomware events — do they have a sufficient backup plan in place?”
“As we approach the new year, there are some concerns around audit,” Mackunis said. There is some sluggishness around various parts of the economy, which may result in asset impairment and going concern. Are any clients going to declare bankruptcy? Then there are growing exposures due to supply chain interruptions. This will impact different businesses in different industries. The potential for fraud is there; CPAs must be able to support their clients while at the same time being able to avoid allegations of failure to detect fraud.“
Tax practice is a little different now than in previous years due to changing deadlines and confusion over IRS guidance, according to Mackunis. “Tax has been pretty predictable in the past due to its seasonality,” he said. “Tax liability claims are generally less severe but more frequent. Due to COVID, we’re trying to heighten awareness of returns where an individual works from a different area than where they live, especially if more than one state is involved.”
And insurers are paying more attention to ESG considerations, Mackunis remarked: “Do our financial statements appropriately reflect changing risks around climate change, and what does that mean to auditors of financial statements? Are they reflecting enough risk on a business for the sake of investors? What risks will emerge from ESG issues?”
Vono foresees potential risks ahead in a number of areas. “Practitioners should be aware of the possibility of business failures,” he said. “There were a number of these in 2020 and 2021, and they will likely continue into 2022. Businesses are suffering from a lack of qualified employees and from inventory and supply chain problems.”
“Also, the ending of government programs will cause hardship to some businesses,” he suggested. “At the same time, the benefits for many employees have ended, a development that may result in many employees returning to the workforce. CPA firms need to be nimble and proactively look at risks under a COVID microscope. They need to gauge changing business protocols and procedures, and the ways these affect businesses. COVID burnout is real, and is impacting how we do business. Expect slower bill paying from clients, and poor record transfers from clients saddled with fewer employees. Early retirement rates are rising, which will require planning both for businesses and individuals.”
Paycheck Protection Program loans will come due in 2022, and interest may keep accruing. If accountants assisted in the loan process, that may be an issue, Vono indicated: “There may be sticker shock for clients down the road, and accountants need to think about managing in that area.”
Many foresee an economic slowdown in 2022 as a result of rising energy prices and supply chain woes. When that happens, there tends to be more litigation, according to John Raspante, director of risk management for McGowanPro. “People are more prone to want to be made whole, whereas when the economy is going strong, they tend to let things go. There’s alway an uptick in liability claims during troubling times.”
“The slow economy and the pandemic have allowed criminals to take advantage of those who work remotely without main office firewalls,” he added. “But the biggest issue may be a lack of goods due to supply chain problems. With the advent of winter, weather-related supplies could be in short supply.”
Net operating losses, in particular, need to be carefully handled by practitioners, Raspante suggested. “Business losses can now be carried back, which was not possible under prior law. But it requires study and planning for the individual situation — it’s a major decision for clients.”
Get proactive
There’s a potential for additional liability exposures in light of the economic challenges many clients are facing,” agreed Anthony Cooper, a tax specialist at Camico. “Economic conditions have a significant impact on the frequency and the severity of disputes, potential professional liability claims, and reported claims.”
Cooper recommended these risk management steps:
- Identify clients that may pose higher risk. Play the “what if” game: What if the economy causes the loss of a client’s customers or a line of credit?
- Increase the level of professional skepticism. The public expects accountants to maintain professional skepticism in all client interactions and services. The tax preparer should not ignore red flags and inconsistencies because of a client’s belief that management is honest.
- Prioritize defensive documentation, including the engagement letter. Significant client meetings should be followed up with a written memorialization of who was present, what was discussed, action items agreed upon, and who was responsible for each. A written memorialization is probably the most important tool for ensuring that both the preparer and the clients are proceeding with the same expectations and assumptions.
After documenting significant meetings and communications, follow up with written communication in circumstances such as:
- A change in the scope of an engagement (which may require a new engagement letter);
- Negative information (for example, a tax return is already late, the client’s failure to timely provide information, the client is facing an audit, etc.);
- Judgment calls (for example, the former accountant took an aggressive position that the client is aware of and has consented to);
- The client needs to take material action on discussion; or,
- Conversations regarding transactions or amounts used for extension payments.
“It’s also important to obtain written confirmation of the amounts used for calculations,” Cooper said. “For example, a confirmation can be sent to the client with the tax extension payment form, giving the client an opportunity to review the information and to change any information that appears incorrect, prior to April 15. The confirmation then serves as a record of the client’s representations in case the client incurs an underpayment penalty.”
Lastly, documentation should be factual and professional, Cooper reminded. “It should be also without personal comments, which may be inappropriate and damaging to the integrity of the documentation.”
