February 2002

The Proverbial Ounce of Prevention

The Enron crisis has landed the CPA profession front and center in the international press, and it has raised pressing and fundamental questions: How could this have happened? What do we do now?

Time will sort out the facts and tell us the role of each party in this financial disaster. Right now, it seems as though the whole system may have broken down. The consequences of Enron's collapse will be far-reaching and horribly painful for many people in many ways. Whatever role any CPA firm or firms may have had, we also need to look at the standards, the regulatory bodies, and the responsibilities of corporate management. What we don't need to do is rush to judgment based on what appears in the media and devise solutions without knowing the full extent of the problem.

Right now, individual CPAs need to make sure their own house is in order. Now more than ever, CPAs must maintain the high standards on which the profession has been built. Remember that CPAs are entrusted with protecting the public interest. Keep that value paramount. Serve and reassure your clients, conduct business, and live your life, even as Enron questions are asked and answered. Be well informed as the profession meets the challenge of this scrutiny. But also be well prepared.

Although it is too soon to tell, one unintended consequence of Enron and similar high-profile scandals is that clients could begin questioning the judgment of their CPAs more than they have in the past. In this environment, CPAs may find more client questions evolving into client disputes.

This makes it even more important that each firm have a thoroughgoing loss prevention program. One facet of such a program is a better understanding of the regulatory environment and the requirements to comply with the profession's code of ethics. Last fall and early winter, even before the Enron story broke, more than 2,000 CPAs across the state stayed on top of ethical practice by attending the NYSSCPA's professional ethics seminars, where they learned more about the importance of ethics standards and the value of risk management.

Risk management should be a common, if not frequent, topic of discussion among firm partners and staff in order to alert the entire firm to loss prevention issues. Risk management should be on the agenda every time the firm's members engage in business planning. Aside from the very real protection it affords, a comprehensive risk management program centered around insurance coverage enables a CPA to focus on clients and their needs and problems, rather than the risks client service entails.

Now more than ever, insurance provides a source of experienced perspective to mitigate liability. It's a rare but real occurrence when a CPA needs to disengage from a client. It is a business or ethical decision that is never made lightly and always requires an objectivity that is difficult but crucial to maintain. Firms must perform client due diligence and screening in order to avoid taking on clients that may be unethical or that may simply be a bad fit for your practice because you lack knowledge of their industry. All too often this is an issue in professional liability cases.

Many CPAs erroneously assume that unless they do audits, attest work, or tax returns, their liability exposure is nil. On the contrary, no professional services firm is exempt from a malpractice or other professional liability claim. For many years now, the number of claims arising from tax services have far outstripped those arising from accounting and auditing services. In addition, as CPA practices grow to encompass more and more services, so does the likelihood of claims in other service areas, such as business valuations and litigation support. Any CPAs without current professional liability insurance should reconsider the decision to be uninsured. Don't let policies that come up for renewal lapse, and review your coverage regularly. If you're self-insured, your coverage may well be inadequate. And I would advise you to act quickly, as rates are sure to climb in the current environment. When shopping for an insurer, ask if they have a staff available to assist you in difficult decisions such as firing a client.

When you have a question or dilemma that involves even the remote possibility of liability, discuss it with your insurance carrier and your attorney. Let this dialogue help ensure that you hold on to your objectivity. Your firm-and, more importantly, the public that depends upon your integrity-will be better off.

As always, the NYSSCPA is engaged in helping New York State CPAs survive and learn from the scrutiny of issues like Enron. Work with us to elevate firm performance. Send us your thoughts on what we should do in New York to strengthen standards, the disciplinary process, quality control, and education. After all, protecting the public depends on it.

Louis Grumet Publisher, The CPA Journal Executive Director, NYSSCPA lgrumet@nysscpa.org