How CPAs can avoid lawsuits risks in their accounting business?

CPAs have a complicated and crucial job. They collect and analyze financial information for their clients, often working to solve difficult questions. They also prepare statements and filings for the government. This work is very time-intensive, and it is essential that everything is accurate. If it isn't, CPAs may face malpractice lawsuits. 

Everyday tasks can easily expose CPAs to malpractice litigation, despite their best efforts to prevent it. Some of the more frequent mistakes include the following:

Tax Return Error

Tax-return work can be pretty risky. A lot of times, clients haven't done their homework or prepared the right forms, which can make the whole process a lot more difficult. And because clients are always looking at the financial impact of their tax filings, any unexpected results could easily lead to lawsuits.

Serving multiple parties 

If you work for more than one boss or partner, you might get instructions that conflict with each other. CPAs who try to please everyone can become a target of abuse and eventually lawsuits.

Business deals with clients

When you're in the business of accounting, you sometimes have to take risks - like partnering with clients on outside deals. If a deal goes sour, your clients might accuse you of self-dealing and taking them to court. To protect yourself, it's important to be transparent with your clients and keep good records of all your dealings.

Non documentation

Failing to document or confirm decisions with clients can get you into some hot water. If you don't explain things from the get-go, they might have unrealistic expectations. And if you end up doing something that's technically correct but takes them by surprise, you might get sued for malpractice. 

Practicing in out of expertise area

As a product manager, you might be tempted to chase revenue in a new area. However, if you lack the knowledge to do so, it could result in some costly mistakes. If your work product is flawed and it harms a client's finances, you will be held accountable.

High risk practice areas

Certain areas of practice tend to be more prone to litigation than others. For example, a large number of malpractice claims come from tax planning and compliance services, audit and attest services, consulting services, bookkeeping, and fiduciary services. If quality-control systems like QuickBooks hosting are not put into place, mistakes in these areas can lead to expensive malpractice settlements or judgments.

While audit malpractice suits may not be all that common, they can still cause a lot of damage to a CPA firm's reputation if they occur. They often happen when CPAs don't do their due diligence on client statements and materials, or when the client is trying to manipulate data to make the financial statements look better than they actually are.

Trusteeship work can be risky as well. Certified public accountants (CPAs) often take on these assignments from long-term clients. They can run into problems when the assignment puts them into conflict with third parties who believe the CPA’s decisions have caused them financial harm. For example, mismanaging trust affairs or mishandling assets might put a CPA and trust beneficiary at odds with each other.

Practices to avoid lawsuits

The best way to avoid being sued for malpractice is to always be thinking about how you could prevent a lawsuit. This means having a loss-prevention mindset in every aspect of your practice. There are many advanced technological options like QuickBooks hosting that can come in handy in preventing the errors & mistakes that can lead to lawsuits.  

Here are a few strategies for prevention:

• As a business professional, it's important to be able to tell the difference between standard operating procedures and abnormal business practices. By keeping up-to-date with a client's financial results and initiatives, you can get a better sense of when something isn't quite right. If you notice that a client's financials are weak or they're venturing into new territory, it's important to raise a red flag. Additionally, it's crucial that you document all client conversations and decisions.

• Being owed money by a client can be frustrating, especially if they are constantly tardy on payments. While it may be tempting to sue them, this carries a high risk of a countersuit. Instead, try non-litigation measures to collect the funds. If you’re unsure how to go about this, speak to an experienced debt-collection attorney for guidance.

• We would recommend that you avoid working with financially unstable clients as they may be more inclined to commit fraud. If a client is on the verge of bankruptcy, they may try to involve you in their crimes. You should also try to research a prospective client’s litigation history. Companies that have sued a prior CPA may be more likely to sue you than those who have managed to avoid legal disputes in the past.

• In order to avoid any legal issues, it's important to know and understand the ethical standards of your profession. The AICPA's Code of Professional Conduct is a great resource to consult for clear guidelines on acceptable vs. unacceptable behavior. If you want to decrease your risk of being accused of malpractice, make sure you're always acting and behaving in a way that adheres to professional conduct standards.

• Use of latest tech in your accounting practices like QuickBooks cloud hosting; a cloud based system that reduces the chances for errors and helps you to organize your accounting in a better way. 

No matter how well you follow the rules, there is always a chance you could get sued. No one wants to get sued, but unfortunately it's a risk that comes with the territory of being a CPA. Malpractice insurance can help take some of the sting out of a lawsuit, by providing you with an attorney to handle the case and leaving you free to continue doing the work you're trained to do.