Professional Liability Developments

by John Raspante, CPA, CPA Protector Plan and Herbert M. Chain, CPA, St. John's University – May 16, 2018
Professional Liability Developments

Jean-Baptiste Alphonse Karr has said, “The more things change, the more they stay the same.” While the accounting profession has undergone massive changes in the past few years, little has changed in professional liability causes of actions faced by CPAs. Failures to detect fraud, missed elections and late filings continue to plague CPA firms of all sizes. While claims generally repeat themselves year to year, there have been some recent developments worthy of discussion. This article will focus on the following claim trends: Foreign Bank Activity Reports (FBARs); late and non-filed returns; and network security lapses.

FBARs

It’s no surprise that because of the intense IRS scrutiny of offshore bank accounts coupled with criminal prosecution of such taxpayers, CPAs would be targets of such egregious clients. This knee-jerk reaction to sue the CPA after tax assessments are issued is not uncommon. The issue with FBARs results from the IRS being relentless and focused on this area of compliance. Strong engagement letter language (see sample language below), possible standalone confirmations of the existence or lack of any foreign bank account, and affirmative responses to the two questions on Schedule B are essential steps to defend these types of claims.

In addition, a well-thought plan must be in place if the CPA concludes there are non-filed FBARs, and a discussion of the offshore voluntary disclosure program must be considered. Since immunity from criminal prosecution may be possible, consideration must be given to securing competent legal counsel. Once the client intends on entering the voluntary disclosure program, the CPA and/or legal counsel should discuss the ramifications of the opt-out provisions with the client.

Late and Non-Filed Returns

Over the past two years, there have been a greater number of claims alleging failure to file and late-filed returns as well as non-filings in other states and jurisdictions where filing was required. Failure to file extensions and required estimated tax payments are more common. The pattern of these types of claims is unexplained. Perhaps these have been caused by the increased reliance on technology, work overload or the simple stresses of tax season. The trend is increasing and disturbing in the frequency of occurrence. A “back-to-the-basics” approach should be used to remedy this trend of claims. Quite simply, good controls, proper team meetings and communica­tions, tracking systems, and a review of the various nexus requirements for out-of-state filings may help mitigate the risk of these types of claims.

Cyber

Cyber perils are the most common, new and emerging type of claim, and may result in the most significant losses — tangible and intangible. For many years, CPAs felt the large retailers and other industries were the targets of these types of claims and not CPA practices. This perception has changed significantly over the past two years. Identity theft, servers held for ransom, mobile equipment lost and data breaches are just a few of the perils faced by CPAs that culminate in professional liability claims. CPAs face this significant risk on two fronts: their own opera­tions and the protection of confidential client information. The damages include regulatory sanctions, legal fees, forensic services, data restoration and the intangible loss — damages to reputation.

Data intrusion testing, password protection and employee training are among the best practices in combating these types of claims. Further, transferring of these risks by securing proper and sufficient cyber liability insurance coverage must be considered.

Sample Engagement Letter Language

Please note that any person or entity subject to the jurisdiction of the United States (including individuals, corporations, partnerships, trusts, and estates) having a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having a value exceeding $10,000 in a foreign country, shall disclose such relationships to us. Although there are some limited exceptions, filing requirements also apply to taxpayers that have direct or indirect control over a foreign or domestic entity with foreign financial accounts, even if the taxpayer does not have foreign account(s). For example, a corporate-owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority. Failure to disclose the required information to the U.S. Department of the Treasury may result in substantial civil and/or criminal penalties.

If you and/or your entity have a financial interest in any foreign accounts, you are responsible for providing our firm with all the information necessary to prepare Form TD-F-90-22.1 required by the U.S. Department of the Treasury on or before April 15th of each tax year. If you do not provide our firm with information regard­ing any interest you may have in a foreign account, we will not be able to prepare any of the required disclosure statements, and, accordingly, do not accept any responsibility for the resultant liabilities that may arise.


John F. Raspante

John F. Raspante

John F. Raspante, CPA, is director of risk management at CPA Protector Plan. He is a member of the NJCPA Content Advisory Board and Accounting and Auditing Standards Interest Group and can be reached at jraspante@bbprograms.com. Herbert M. Chain, CPA, is an assistant professor and executive director of the Tobin Center for Executive Education at St. John’s University. He can be reached at chainh@stjohns.edu.

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This article appeared in the May/June 2018 issue of New Jersey CPA magazine. Read the full issue.