The Dangers of Dabbling: Ensure That Firm Staff Have the Proper Experience and Training to Take on an Engagement
To meet evolving marketplace needs, CPAs often look to diversify their service offerings. However, undertaking a new service or providing service to a client in an industry with which the CPA is unfamiliar, frequently referred to as "dabbling," can elevate the risk of errors and professional liability claims. Why? Reasons include inexperience and inadequate training, which may limit the CPA's ability to identify and address issues. THE NEED FOR COMPETENCE One of the fundamental principles of the CPA profession is the standard of due care. Section 0.300.060, Due Care, of the AICPA Code of Professional Conduct indicates that due care requires the CPA to conduct his or her activities "with competence and diligence." This section also states that the CPA should "undertake to achieve a level of competence that will assure that the quality of the [CPA's] services meets the high level of professionalism required" by the professional standards. Further, a CPA's level of competence establishes "the limitations of a member's capabilities." Thus, understanding the CPA firm's strengths and being cognizant of its limitations constitute not only a good risk management practice, but also are required under the professional standards. DEFENSE COUNSEL PERSPECTIVE Dianne Wainwright, Esq., a partner with Margolis Edelstein in Pittsburgh; Thomas Falkenberg, Esq., a partner with Williams, Montgomery & John Ltd. in Chicago; and Kevin Murphy, Esq., managing attorney for Carr Maloney PC in Washington, all specialize in the defense of accountants' professional liability claims. They shared their insights about the relevance of professional competence in defending CPAs, in the following Q&A. Can you share a story in which "dabbling" created a professional liability issue? Wainwright: I defended a CPA firm in a lawsuit filed by a bank. The firm's client was an online retailer. The bank provided asset-based lending to the client and required an audit. The CPA firm performed the engagement despite having no prior experience working with web-based businesses. The client got the loan but later defaulted, and the bank sued them as well as the CPA firm. An issue that arose during the audit was the capitalization of expenses incurred in setting up the company website. CPA firm staff had not encountered this issue before. They performed some research and concluded that the client's percentage of expenses capitalized was appropriate, but did not document their research or rationale for this conclusion. Some of these expenses could not be capitalized in accordance with generally accepted accounting principles. Given the firm's inexperience in the industry and lack of documentation, defending the work would have been difficult, and the case was settled. How often does the subject of competence come up in defending accountants? Falkenberg: I would estimate this issue plays a role in 25% of the lawsuits I defend, at least in part. Murphy: Competence is often implicated in defending tax engagements, especially those performed for clients in niche industries or in niche services, such as estate or gift tax, where the rules are complex and frequently changing. Wainwright: Competence is one of the areas where the plaintiff's attorney will seek extensive discovery on all engagement personnel to determine if the team had the right background, training, and expertise to perform the work. To enter a new practice area, there must be a "first time" that service is rendered. What insights have you gained from defending lawsuits involving CPA firms rendering a "first time" service? Murphy: The professional competence of the firm to perform the engagement will be challenged. Robust documentation of research performed regarding the service and the client's industry, as well as applicable professional guidance and standards are important. It is also helpful to have documentation evidencing that members of the engagement team completed directly relevant continuing professional education. …