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How To Minimize The Damage Of Lawsuits

by Rickard Jorgensen, FCII, ACIArb., ARM


Things Beyond Your Control That Precipitate Lawsuits

With the advent of the computer era and information age, the cultural and business climate of the nation, and world, has shifted. Businesses have become more complicated, as attitudes sanction greater and greater risk-taking. No longer are there sure-fire lifetime jobs with one employer, or steady careers with guaranteed advancement. As individual income levels stagnate and fall, defalcation and fraud have risen. In any case, it is virtually inevitable that, no matter how careful he is, any accountant will one day become involved in a disagreement or a lawsuit.

Facilitating the rash of law suits has been an ever-wider scope of accountant litigation.

Until the last few years, audit and tax suits were almost the exclusive domain of litigation. But lawsuits have now widened to include management advisory services (MAS), compilation and review, and virtually any other service you might perform One recent case, for example, resulted in a multi-million dollar award against a CPA firm for its performance of litigation support services. Spurring the litigation surge has been the profession’s recent adoption of specific standards of practice, which, while tightening up accounting practices, have given plaintiffs a written standard of professional conduct. Adding further fuel have been new theories of injury.

The point is that somewhere out there, litigation is a reality for which you must be prepared. In this hazardous climate, it behooves you to prepare now.

How To Minimize The Damage

The basis of your defense will be documents related to the engagement and to the firm’s practice. Conversely, a key weapon in the plaintiffs arsenal will be to try to use those same documents to show that you deviated from professional standards of care.

Reading The Signs Of Litigation

As noted in the white paper “Road Map of a Malpractice Suit“, the first indication of potential litigation is often decreasing cooperation from the client in ongoing work, to the point of discharging the accounting firm. If the reason for the change is the client’s attempt to cover up fraud, defalcation, or his own malfeasance, the lack of cooperation might quickly turn into abuse, in order to intimidate the CPA firm into relaxing its standards. Here are some of the abusive behaviors to watch for:

  • The client drags his feet on completing work-in-progress that was agreed to in the engagement letter.
  • Documentation for the project is either not provided, incomplete, or altered.
  • The client presses for limiting the scope of the CPA’s work, or pushes the CPA to come up with favorable results.
  • The client refuses to sign the relevant paperwork.
  • The client either overtly reneges on his agreement to limit circulation of work products to third parties, or you suspect he will. That could spell liability problems down the road.
  • The client alleges malpractice, negligence, etc., which might be followed by a written statement of claim demanding money or other compensation.

There are other signals of impending litigation:

  • The client gets into financial trouble — sometimes years later — following services performed by the accountant.
  • If your firm is discharged, the successor accountant requests unusual information from you.
  • The client or his counsel requests to review the engagement itself or the working papers of an engagement.
  • Actual legal papers, including subpoenas, are served.
  • Third parties, government boards, or regulatory agencies request your records in connection with this engagement.
  • Boards, regulatory or government agencies request information or want a hearing on matters relating to your firm.
  • Your firm is requested to participate in a special investigation of either the client or your firm.
  • Parties in another litigation request records pertaining to a particular engagement.

What To Do

When you suspect or discover that you’ve made a mistake, or you anticipate trouble from an engagement, there are a number of steps to take:

  • Don’t try to hide an error from your firm; tell your people about it.
  • Talk to your insurance company. Use their expertise and experience to help work out a strategy. You must tell them in any case since failure to do so may be cause for the insurer to void coverage.
  • Read your policy carefully, paying particular attention to your duties under the policy regarding the provision of notice of a claim or potential claim, admission of liability, and cooperation with the insurer.
  • Don’t try to deal with or settle the dispute or any other problems yourself. Strictly limit further contact with the client so as to not aggravate the situation. Use your insurance company: cooperate, but don’t meddle in their efforts.
  • Don’t admit your liability to the client. This can actually precipitate a suit, and might limit the availability of, or even void, your insurance, since most insurance policies specifically prohibit insureds from acknowledging liability. Besides, you might also find out later that the error is not all your fault.

Preparing For Litigation

You and your attorneys should assess the potential scope of the litigation. Especially in cases of third party liability claims, determine just who was affected by the firm’s service or work products, who suffered what damages, and the extent of those losses. Then analyze the engagement letter and actual engagement, and look for any insufficiencies, ambiguities, errors, unfulfilled obligations, incomplete tasks, etc.

Weed out potentially damaging work papers before litigation actually begins. Once the lawsuit is filed, it won’t be legal to alter these papers. Especially remove memoranda that note any suspicions or misgivings you might have had about the client; these can come back to haunt you when plaintiff attorneys charge you with negligent misrepresentation for intentionally and knowingly providing false information. Remove lists of tasks, especially those not completed, that can be construed by plaintiff counsel as not completed or completed improperly, and therefore breached the standard of care and duties of the engagement. You or any other personnel who were involved in the engagement should also fill in any gaps in the records (without falsifying dates), to make their recollections as complete as possible. Any newly created notes, workpapers, etc. should be dated when they were actually created.

Be sure that all personnel make full disclosures of any information to the relevant firm officials and to trial counsel. Holding back information is the epitome of shortsightedness.

Finally, have a colleague not directly involved in the engagement conduct a peer review.

Prepare For The Future

It is highly recommended that every accounting firm establish a risk management committee that would be responsible for malpractice prevention as well as defense and response in the event of claims and litigation. Their duties should include:

  • Overseeing engagement letters and actual engagements;
  • Handling incidents of error or perceived error by staff accountants;
  • Handling morale problems that might affect the staff;
  • Addressing potential and actual claims, and malpractice suits;
  • Disclosing information regarding the claim;
  • Dealing with subpoenas for testimony, work papers and other documentation;
  • Overseeing and arranging expert testimony from firm members;
  • Dealing with requests for meetings with litigants or potential plaintiffs;
  • Dealing with the firm’s insurance company, and having strong input into the selection of trial counsel;

In addition to a risk management committee, you should designate a preferably senior member of your staff as the firm’s “confessor,” a well-respected, likable and trustworthy person to whom personnel can go, without fear of unjust retribution, to disclose any errors they suspect they’ve made, suspicions about clients or other staff, or even just plain “gripes.” It is very important that the committee and the designated “confessor” discuss openly and freely past mistakes that have been made by firm accountants –especially those committed by the senior partners.


Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or



2 Responses so far.

  1. Mr Gold says:

    Lawsuits against a CPA are rare. The reason is that a lawyer doesn’t make enough money because the damages are low. Under a 100K in damages and no lawyer will take the case. Fear mongering by insurance companies pays off handsomely and if we look at their enormous income you realize those lawsuits don’t exist.

    • jorgcpa says:

      Thanks for your comments. I’m not sure where you get your data from but you are incorrect. On average, in our program we see about 1,200* claims against CPA firms per year. The largest in my experience has been several million dollar audit services claims (although I know from my past experience at Aon of many that were in the ten of millions of dollars) but the most common claims relates to tax issues where damages are lower (usually hundreds of thousands). Apparently, you don’t work in the accounting profession or the professional liability insurance industry so you would be a bit more circumspect. As regards law firms active in this arena, there are many specialist firms that make a career from defending CPA firms against malpractice suits. Again, I am not sure of the basis for your remark but I could put you in touch with the Defense Research Institute if you need to talk to CPA defense lawyers. Feel free to contact me at in you have any questions.

      * the AICPA Professional liability program with Aon is significantly larger.

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