Sponsored by AICPA and CITRIX Share File and hosted by Accounting Today, the March 31, 2015, webinar “Protecting Your Firm From Liability” shares the expertise of John Raspante, Director of Risk Management at NAPLIA.
In this important webinar, Raspante shares techniques for combating claims and protecting your firm against liability, especially at the tax preparation time of year. Below we share with you the webinar’s key learning objectives: understanding what areas of practice generate the most claims, treating client assessment as the first line of defense against claims, and steps for crafting a “get-out-of-jail” engagement letter.
Statistical Analysis of Claims
A statistical analysis of claims reveals that the areas of service involving the highest incidence of claims are:
- Tax Services, which accounts for 55% of total claims
- Compilation and Review, which accounts for 13%
- Consulting, which accounts for 11%
- Audit, which accounts for 10%
- Fiduciary, which accounts for 5% of total claims
If you look at the areas of most dollars lost, the outlook changes somewhat. Audit involves the highest loss of dollars, at 38%; tax services shows a 17% loss, compilation and review 13%, consulting 8%, and fiduciary 5%.
Statistically, the biggest cause of audit claims is the failure to detect fraud, followed closely by financial statement errors. Other reasons include conflict of interest, insufficient disclosure, engagement disputes, and fraud.
Since tax services represent the most statistical majority of claims, it is wise to look at the client type of these claims. Individuals comprise 35% of claims; C Corp 20%; S Corp 16%; 990s, 1041s, and 706s 13%; payroll 8%; and state and local comprise another 8%.
Managing Risk: Best Practices
Many firms focus risk management on the initial stages of client engagement and assessment. In order to minimize fraud and increase fraud detection, best practices for risk management focus continually on proper documentation. To increase risk management through documentation opportunities, Raspante advises that firms take key steps at each stage of client interaction.
In the client selection stage, include clients with healthy organizations and document and engagement letter. At the planning stage, be inquisitive and observant and focus on internal controls and the documentation of forms, checklists, and memos. Be thorough and skeptical in the performance stage, and don’t be afraid to ask questions and confront the client, if needed. Document through work papers and all correspondence. Finally, at the conclusion of services, don’t forget to document management letters.
The first piece of advice offered in this webinar is to have your engagement letters reviewed by your attorney at least once a year. After client assessment, these letters are your second line of defense and a comprehensive contract, not just a fee agreement. A well-crafted engagement letter will:
- Establish a mutual agreement
- Define the scope of engagement
- Define provisional contingencies
- Aid in the prevention of differing expectations
More specific details are outlined in the webinar concerning these engagement letters as well as the importance and specifics of disengagement letters.
Keeping Everything Organized and Accessible
Once you have a detailed plan to protect your firm from liability, the next step is keeping all information and documents organized, accessible, and secure. Well-crafted letters of engagement, checklists, memos, and other documents are useless if you can’t access them when needed. eFileCabinet offers the premier solution for you firm’s needs.
With document management software you can have a business solution that will not only provide a seamless document management solution, but will also provide you with FINRA-compliant, audit-safe software that ensures that private information will stay private.
Take 15 minutes and learn how we can help your firm by filing out the provided form today.