Stephen Vono and John Raspante of insurance provider McGowan Pro look at the new areas that are sparking claims against firms — and the tools they can use to protect themselves.
Transcription:
Dan Hood (00:03):
Welcome to On Air With Accounting. Today, I'm editor-in-chief Dan Hood. Every year it seems it brings new reasons for clients to sue their accountants, or at least to feel like they could sue their accountants. And when those fail, they fall back on the tried and true reasons to sue their accountants and to come up against them with the liability issues. Here to talk about the brand new risk areas and some of the perennial favorites — or non-favorites, however you want to look at them — as well as ways to protect your firm against them are John Raspante — he's the risk management director at McGowan Pro. John, thanks for joining us.
John Raspante (00:30):
Thank you.
Dan Hood (00:31):
And we've also got Stephen Vono. He's the senior vice president at McGowan Pro. Stephen, thanks for joining us.
Stephen Vono (00:35):
Thanks for having me, Dan.
Dan Hood (00:37):
Now, you both are long-term experts in this. You've been following these kind of risks and how they emerge and how they move around and how they develop and how some of them stay and some of them go away, and I know you're paying attention to it. Maybe you can start by John, me telling us some of the big new threats you've seen to emerge over the past year or so.
John Raspante (00:53):
It has been a challenging year and we've been busy. We've had some issues, some claims the taxing authorities are sort of out in full blown, and anytime there's tax examinations, there tends to be an increase in claims. There's also been a lot of pronouncements in the accounting and auditing area. Let me touch on a few with respect to accounting and auditing. Cannabis, although it's been around for a while with more states having legislation where cannabis is legal, we still have the financial statement reporting challenges with cannabis, and that's a growing area. No clause, which is the abbreviation for noncompliance with laws and regulations, is just adding another element of disclosure and more work for accountants and sometimes not really being in a position to determine whether there's noncompliance. We see that a lot with E R C, which I'll touch on in a bit. The employee retention credit has sort of created a no clause consequence also, and E R C has been the big challenge.
(02:04)
If we are looking at one area, it's probably the area we're sending on the most. We get the most calls in that area. We've had a few claims. We developed all types of resources, engagement letters to manage it, but it's not going away. The statutes have been extended for the nine 40 ones. The IRS is suspended processing. They've seen the rampant fraud in this area, and as a result, accountants get stuck in the middle. Even if they're not doing the amended payroll returns. They do have a role in the amended entity returns for the tax consequences of the E R C P T E T, the pass through entity tax. That's no stranger either. We've received some claims already. We've developed some resources for it. The fact that it's not uniform across the country is
Stephen Vono (02:58):
Creating challenges, whereas some states have P T E T, some states don't. Some have elections, some have reconciliations. It's just another area that accountants have to learn and learn pretty quick. So those are some major areas they've developed probably in early 2022 into 23, and we're expecting them to continue.
Dan Hood (03:22):
Gotcha. Well, it's interesting. I mean, a lot of those were have in common, right? There are new laws or new regulations that have come out and accountants are sort of used to having to get used to that, but some of them bring more risk than others. I'm a little surprised cannabis is growing, but I guess as you say, as it expands across the country, I would've thought that had been around enough that we would sort of have wrapped our heads around the risk there. But as you say, it is growing to more and more states, so it's reaching more and more accountants. On the flip side, as you said, there's sort of risks that are forever that are perennial. They're not tied to a new legislation or a new regulation. They're constant. They're things you always have to look up for. Maybe Stephen, can you lay out some of the sort of perennial threats that you see accounting firms facing on a regular basis?
Stephen Vono (04:07):
Sure. When you say perennial threat, I immediately think the gift that keeps on giving, right?
(04:15)
And the first one that comes to my mind is one that we see often, which is the failure to detect fraud claim that's been around for, I've been doing this for almost 30 years and focusing on accounting firms and risk management for accounting firms, and that's the one that always comes up. The thing that I find is interesting is that we're now seeing the failure. When you say failure to detect fraud, you immediately think audit, but it's happening in all service areas, it's happening in tax, it's happening in compilation, it's happening in review, whatever. There might be some kind of a connection to a fraudulent activity. It can cause a problem. So in response to that, I tell accountants that there really needs to be some upfront good due diligence with the client that they're working with, and do they get a really good gut feel for who they're working with?
(05:25)
But the majority of what goes on with affiliated detect fraud is the person who's been working with that company forever and knows all the ins and outs and consequently knows how to get around them. And they're the ones that have the history of committing those kinds of frauds that the accountant gets blamed for missing. But I share with clients, with my clients who are accounting firms that they should be going over the risk of fraud with their clients on an ongoing basis, going into the engagement, making sure there's tight engagement, letter language, then having a conversation around their client's internal controls, what are they doing? Offer the service to do an internal control review, make some more money on the engagement, do a separate engagement and offer that offer perhaps a unannounced bank reconciliation service where you make unknown to all the employees, but only to the people in the know that you're going to walk in one day within six months of Sinai, an engagement letter or however long that you're going to do a surprise bank reconciliation that will keep everybody on their toes.
(06:52)
So there are things you can do, but the biggest one really is ongoing conversations about what the internal controls mean to the company and how they should be processing those. That's a big one. Then another perennial thread. As you point out, anything that is time sensitive, missed elections is a big one. The calendar really needs to be your friend here and help remind you of the different things that need to be done in a timely fashion. But anything that is time sensitive is a big one. Conflict of interests, that's an issue that we see ongoing. That comes back. For instance, if you're an accountant and you're doing a company's a partnership tax return and they're 10 partners in the company and you're doing two 10 forties, well, is there a conflict there? And what about the other people who you're not doing those 10 forties for and how could that be a conflict and how could that cause problems?
(08:04)
It does, and we've seen that happen. So conflict of interest continue to be an issue. And then the one that kind of is surprising is required skills. What's your skillset and are you staying in your lane? If you're the kind of accountant that dabbles in something like for instance, we already talked about cannabis. You can't dabble in cannabis. You need to jump in. You need to be the all-knowing on that particular topic because you've got federal law and you've got state law and they differ. And so that's a big issue. If you do have a required skillset, do you have the proper certification or maybe the proper designation if you're doing valuation analysis, are you a C V A? Are you putting yourself out there as an expert? Maybe you shouldn't be putting yourself out as an expert because if the claim happens, the plaintiff attorney might try to tear that down. So rather than use the word expert in your marketing material, you just say you have a lot of experience with, or you focus on something of that nature we find is real helpful in helping bring down that particular kind of an exposure. But yeah, the required skillset I think is surprising. It's kind of a no-brainer, but people kind of veer in and out of their lane at times, and so we really encourage people to make sure that they've got the right skillset and make sure that they're doing what they need to be doing.
Dan Hood (09:46):
It's funny. It's funny because accountants are so all about their expertise and their skillset sets and the skill sets that they bring, and nobody else can do the things we do that you would think they would be more careful about that. But as you say, we hear all stories about accounting firms that do one or two benefit plan audits a year because a client asks them. And so they say, well, I'm an accountant, I can do this. And they may technically have the credentials, but they don't have the expertise really to do it dabbling, as you say.
Stephen Vono (10:11):
Yes, I would agree.
Dan Hood (10:12):
Alright. One other thing I want to pick up from that. That was a lot of great advice sort of worked into those. Your description of all those, there's a lot of great advice, and one of 'em is clearly constant communication. We're going to talk about engagements, letters later, and the importance of engagement letters. You've already hinted at it or pointed to it, but I love the notion of going in and not only you, probably you should put in your engagement letter. We're not looking for fraud as an example, right? This is not a fraud detection engagement, but then the fact is you can go in and say, listen, I can do that. Here's a service that I'll offer to do that, and that reinforces that message. If I'm not doing this, you understand that I'm not looking for fraud, but I can if you want to pay me extra money. So it's sort of two purposes, right? You hope to get some extra money, but also you're reinforcing the message that this is a service that I'm not doing. And you can do that with any, it's not just fraud detection, but anything that a client might expect you to have done if you say, I don't do it, but I could charge you for it if you want. It reinforces it and maybe gets you a sale.
Stephen Vono (11:06):
That's an excellent summary, Dan.
Dan Hood (11:08):
It's great stuff. No, it's right on. And as you say, we talk about this, people talk about this every year because there are issues that come up on a regular basis. But now I want to turn a little bit, we've talked about emerging issues. Johnny, given those, Stephen, you've given us great summary of some of the constant problems, but maybe we look at head to next tax season because, because I think if I'm not mistaken, a huge number of claims come out of tax season. It seems to be just one of the big generators of claims. Hey, John, do you have any sense of big issues that accountants should be paying attention to as we, and we're still a couple of months away, but we're, it's already being looming large for some people that they should be thinking about?
Stephen Vono (11:43):
I think it's no secret that the taxing authorities are more vigilant. They're empowered with
John Raspante (11:52):
Budgetary issues that have created augmented their staff count. So I expect there will be more audits, not just in individual returns, but sales and use payroll taxes have always caused an issue with independent contractors. But I think accountants have to be very careful with respect to new clients, particularly the new clients who come on board where the prior C P A had different software that could create a huge issue if you don't proforma the returns and capture the attributes and carry forwards and NOLs and everything else that might be on a prior return. So I expect that will happen. We've seen a shift in a lot of people going to small firms, larger firms getting rid of their C and D clients, and they have to be serviced somewhere. So I'd be very careful with new clients. Client screening is your first line of defense that would be mindful of that.
(12:52)
Even though tax season, the focus is of getting your individual returns done. Some of the P T E T elections have to be made during tax season, and you don't want to miss that. Those are irrevocable. Even with the consent of the commissioner, those can't be reversed, so you don't want to miss that. And that comes up in March. In New York, state Jersey has what they call bay tax business activity income tax, and other states have jumped in Kentucky recently enacted P T E T regulations. So I would be mindful of that. The pandemic has caused a lot of issues in the tax world. One of those is remote employees and also a shift of people leaving large metropolis and going to smaller towns. So now you have a lot of residency issues. New York State where I practice and where I practice for a long time has been looking at residency audits. They're tough audits. There's both statutory resident rules and domiciliary rules. So if that client comes in and last year they were in New York this year, you see them in Montana, your antennas have to go up and say, well, you truly a resident or you're still a domiciliary in New York State. So on top of everything else, trying to get through taxis, and I think you have to look at these, and I think prudent C P A for me used the extension more frequently and get to these more challenging returns post April 15th.
Dan Hood (14:23):
Got you. And I've heard stories about New York tax investigators using things like social media posts with time and date stamps to say, well, there's a picture of you in New York City on the day, you say one of the 181 days or whatever, it's that you claim to be elsewhere. So those are pretty, I understand they're pretty serious about that kind of thing.
John Raspante (14:41):
No, the technology is advanced. They could pinging cell phone towers and they could see what calls emanated from. Obviously EZPass is another way,
Stephen Vono (14:50):
And you do have to follow the rules. And New York State is difficult because there's two tests, statutory resident and the domiciliary rule.
Dan Hood (15:01):
I did not even think about easy. Oh, now I got to get rid of my easy pass. Anyway, this is great. I hope we haven't scared too many people, raised up a lot of issues, a lot of areas of risk that are either new or returning. We've hinted at some of the ways you can protect yourself again, or not hinted it. We've spoken about some of them, but we're going to dive more deeply into them. But first we need to take a quick break. Alright, and we're back with John Ponti and Stephen Vno of McGowan Pro, talking about, we've hopefully scared you a little bit, not too much, but a little bit with some of the risks that are coming up that are emerging now as we speak or that are going to be facing during tax season, but also some of the ones that have been around for a while. We've talked about some of the ways you can protect yourself. Good client screening. We're going to talk more about engagement letters because that's a huge line of defense, but maybe Stephen, you can start. What are some of the things that firms can generally do to mitigate these kind of risks?
Stephen Vono (15:56):
Well, here at McGowan Pro, we really want to help accountants mitigate their risk because we're insurance brokers. So it's a win-win, right? I think as John already mentioned, the first line of defense is a really good client screening and client selection process. So you want to make sure that you're doing client background. Do you have a client selection committee for, I mean the audience we're talking to, I'm assuming is running the gamut from the solo C P A all the way on up to the larger firms. So obviously if you have the resources to do a client selection committee, that's what you want to do. You want other people having their input, especially if the rainmaker who comes into the firm says, well, these are the reasons why I want to bring them on as a client. Are they solid reasons that there's no, well, maybe a control issue or a conflict issue.
(17:05)
Other people see things from a different set of eyes that might be helpful. So the client selection process is real important. The second line of defense that we've already kind of mentioned is the engagement letters. We review engagement letters for our clients all the time and make suggestions on the different kinds of caveats. I'm not going to get into that now because we will dive into that a little bit deeper in a few minutes. But then number three, ongoing communication. Again, something as simple as just constantly being in touch with your client to make sure that that relationship is going well and that the engagement is going well. People don't sue people that they like as much as people they don't like. It's a given, right?
Dan Hood (17:53):
Right. You never call me, so I'm going to sue you.
Stephen Vono (17:55):
Exactly. But the other thing you want to think about within that process of ongoing communication is grading your clients. Right? Now you can define the A, B and the C and the D, but if you have a lot of C and D clients that you just don't like working with, they're a pain in the butt. They don't get back to you. They don't give you the information you need. You need information from them to do your job effectively as an accountant. And if you're not getting it and you keep banging your head against the world to get it, why are you continuing to work with them when maybe someday they're going to turn around and sue you because they don't like what you did for them when they were the ones who set it up to be? That's a problem. So you want to make the B clients, A clients, and you want to get rid of the C and D clients.
(18:46)
And then billing, how do you bill? Are you getting a large enough retainer upfront? Are you billing enough? Are you collecting enough on an ongoing basis? Don't let your billing slip sixty, ninety, a hundred twenty days out because when one day you'll get a phone call that says, well, I haven't been paying you because there's a problem here. We see that very often. So that's another red flag and an indicator is if you're not getting paid within 30 days, why? What's going on? Are they late? Because, well, they're just late. Okay, fine, let's get 'em up to speed. But that's a real good way to figure out if you and your client are on the same page and everything's going swimmingly smooth. So those are just four points and we can drill down deeper, and we're going to do that a little bit with the engagement letters later on. But yeah, that's what I would leave you with.
Dan Hood (19:44):
Yeah, it's weird saying we could talk for days. We could talk for days about all this stuff we go on for if everyone had the weekend free, we would meet up and talk about that, but we have to keep it pretty soon up the
Stephen Vono (19:54):
Chair and grab a hot chocolate.
Dan Hood (19:57):
But I love the billing regular thing because among other things, sort of the flip side of you want to make sure you're alert to any problems, but nothing says, don't, I just got a big bill because they didn't bill me for the quarter, and suddenly I'm faced with a big bill and I'm not happy. So you know what? I'm not going to pay it. I'm going to sue. So I mean, and it's also part of that ongoing client relationship that you talked about, right? If you're a happy clients, clients you talk to, a lot less likely to sue you. It's all good protective stuff. You mentioned engagement letters. No engagement letters are a huge line of defense. John, maybe we can bring you in to talk about what are some of the things that specific clauses that accountants should be looking to include or things that they should be. This is wording you got to have in there.
Stephen Vono (20:40):
Okay. Before I do that and tackle that concern, Dan, I do want to mention, and you mentioned a few times
John Raspante (20:47):
That we're scaring the audience, and that's okay to be scared,
(20:51)
But there's also phenomenal opportunities. So the firm that was scared about the paycheck protection program, they failed to capitalize on an enormous amount of fees and an enormous benefit provided to business of all sizes, essentially keeping them afloat. The firm that learns E R C and does it properly the same way, it's going to create an enormous growth in fees. So I agree, this is scary, but if you do it right, there is an opportunity. It's an astounding opportunity in my opinion. But back to engagement letters. So annually we update our engagement letters This year, I believe that task is going to be a little more onerous in that there's a lot of clauses that we have to capture. One is the whole verification of data, particularly in tax prep. Whose responsibility is it to verify it? And I could talk to you for an hour about the ethics code in circular two 30 or what it says, but what you'd want to do is push that responsibility as far back to the client as possible.
(22:00)
There will be an increase in examinations. I think publicly, the I R S said there would be, and New York State is certainly no stranger to that in the other states. It just makes sense. So you want to have that clause in there. And we've built a clause that will be in our engagement letter book this coming season. Also, we received a lot of calls with respect to we get a K one from a client, and there's 15 or 20 other states that have very small and minimis amounts, and the client doesn't want to pay us for each of those returns. How do you deal with that? So we developed, again, a letter which has some disclaimer language in it, but really tries to enforce the fact that you really should file in those states, even if it's the minimus, the statute of limitations won't begin until you file.
(22:54)
You may have NLS that may not be captured. So that's important also with somewhat of an exodus out of certain states into other states. This whole movement of people during a pandemic, you really have to, as an accounting firm, look at venue and jurisdiction. What states laws are more beneficial to resolve a claim? Is it the state that you're in? So if you're an accounting firm in Ohio, but the client lives or has made a move up north to Michigan, which state should resolve the dispute? So you really need to get with your risk managers, your attorneys, that could make the difference in a claim being dismissed versus the claim being adjudicated. If you can get limit of liability in there, get it in. Why be sued for an endless amount of money might not settle on a multiple.
Stephen Vono (23:45):
It's worth a shot. It's not a complete safety net, but it's certainly worth a shot. I would certainly put a provision in the letter that the client has acquiesced to using the internet as a mode of communication. The last thing, you want us to not have consent and some file is corrupted or intercepted or hacked into, and you get hit with one of these confidentiality breaches. Those are a few, again, I could talk all day about them, but our book, we're proud of it. We try to capture all these salient clauses that mirror the prior years claim exposure.
Dan Hood (24:23):
Well, I mean, those are all fantastic thoughts and things people should be considering having. And they also, I think, point to the fact that there are a lot of different other things that you should be thinking about in there are, I don't want to say everything again, we don't want to scare people. We just want to get people thinking about there are ways to protect yourself against a lot of different risks. And there a lot of them come down to literally just align in your engagement letter and figuring that out. So we could spend a lot more time on, unfortunately we can't today because we're a little limited time. But I want to give you each chance, any final thought you'd like people to take away? Stephen, I'll give you first crack at this. Any final thoughts for people to think about in terms of risk management, liability, that sort of stuff?
Stephen Vono (25:03):
Yeah, I think that the easiest way to respond to that is that if you think that anything's going on that is not right with your client for whatever reason, you get a cranky phone call, you get an unhappy sounding tone in the email, call your broker and talk about it. A lot of the time, I get this phone call all the time, well, we don't really want to report this incident because we think it's going to be problematic for us. Well, it's going to be more problematic if you don't talk about it. And it doesn't necessarily mean, and at the end of the day, a lot of people think that if you report an incident, it's going to automatically dinging them on the premium at the renewal. Do not worry about that. At the end of the day, yes, premiums will be affected not by incidents, but by actual claims with payouts.
(26:01)
So you can talk all day long about early reporting because that's what you really should do to protect yourself and your brokers or your risk or your risk management guides, or the folks at the insurance company should have some kind of a hotline available to you. We at McGowan Pro have two layers. We've got a hotline with an attorney. We've also got John Ponte in our risk management department. That's real important. Just pick up the phone and call. Don't go it alone. Even on some of your I R S notices, people are like, we get these all day long. Well, we're supposed to call on every single one. Well call us, call your broker, whatever, and make a plan on how to deal with that, but keep the communication flowing and call when you're not sure. That's part of the program I was talking about earlier.
Dan Hood (26:55):
That's excellent. Excellent advice. I'm always impressed by the amount of resources and information and engagement that insurers want, that they want. We want to, as you say, it's a win-win. If you don't get sued, everybody wins. And it's better to spend a little time in advance and avoid it entirely than spend a lot of time fighting a claim or whatever after the fact. John, any final thoughts people should take away?
John Raspante (27:20):
Well, notwithstanding Steve's fantastic comments, I would go back to the basics. And I know it's hard for the small firms, particularly the sole practitioners. There's just not enough time in the day to do all of this. But I would go back to the basics. I would do client screening, both new and existing clients, existing clients change and do a little screening. Technology has empowered us to do returns a bit quicker, so you have a little more time. And I would screen clients, again, new and existing, the power of documentation to write things down to email, to take notes. Email is so powerful in confirming communication engagement letters. And the flip side of an engagement letter is a termination letter or a disengagement letter. If that happens, I would certainly use those. I would lean on your peers. Most accountants belong to either the A I C P A or state society, if not both associations, alliances, wealth of information, and just brainstorm with your colleagues.
(28:32)
And I guess my big takeaway is if something looks bad, smells bad, get away from it. We're very bad as a profession in terminating client relationships. And if we do it, it tends to be at the 12th hour, which only complicates things more. So there are clients that aren't desirable and every practice and rich herself of those. And every claim that every accountant who has ever been sued that I spoke to said the writing was on the wall. There were indications, there were red flags. I should have known this years ago. Everyone. And I believe Steve can attest to that. So those are a few takeaways, Dan, that I might help this tax season and beyond.
Dan Hood (29:14):
Absolutely. Great advice, gentlemen. Thank you very much. As you said, we could talk for a lot longer about this, but unfortunately we have to go. Stephen Vono and John Raspante of McGowan Pro. Thank you both for joining us today and sharing all this advice.
John Raspante (29:27):
Thank you.
Stephen Vono (29:27):
Thank you very much, Dan. This was fun.
Dan Hood (29:29):
Yeah, good stuff. And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Kevin Parise. Rate or review us on your favorite podcast platform and see the rest of our content on accountingtoday.com. Thanks again to our guests, and thank you for listening.