The call for client accounting services (CAS) has been growing, and with it the potential for legal liability. Carefully managing client expectations and employing strong engagement letter disclaimers will positively position a CPA in the event of litigation.

Client accounting services (CAS) are a tremendous value-added option for clients that can provide immense profitability for CPA firms. However, potential legal liability may arise. That said, with solid client expectation management, an honest assessment of the firm’s competencies, and engagement letter disclaimers, CPAs can pursue CAS opportunities while mitigating the risk. 

CAS often includes maintaining financial records, cash-flow management, fractional CFO services, bookkeeping, bill paying, financial reporting, payroll processing, and an array of other advisory services.  

While CAS has been around for decades, a noticeable surge began during the COVID-19 crisis, with economic injury disaster loans (EIDL), the paycheck protection program (PPP), and other programs available to keep businesses afloat. CPAs bolstered their reputation as advisers with skills beyond tax preparation and attest services, the latter being after-the-fact services. CAS has expanded and, according to Gusto – a payroll processing and HR services company – 83% of business owners want their accountants to offer business advisory services coupled with their traditional services.  

While the market may be requesting CAS, various exposures have been reported to McGowan Professional. Some of these include the following: 

• Allegations of competency violations  
• Failed delivery of services offered 
• Independence impairments 
• Failure to detect fraud 
• Breach of contract 
• Professional negligence 
• False and misleading advertising 
• Unwarranted and excessive fees

One of the key risk mitigation strategies is management of clients’ expectations. For instance, a CPA providing fractional CFO services can very well culminate with providing sales and use tax compliance, but it could very well be a service the CPA never contemplated performing. Or perhaps, a client recently heard about the quality of earnings services provided by CFOs. Again, this could be a service outside of the scope the CPA intended to perform. Another common expectation by clients is maintaining payroll and sales and use tax compliance. As you can see, fractional CFO services is a very broad category that requires specific engagement letters.  

The first step would be to manage the clients’ expectations from the beginning. Once this is achieved, the CPA can access their competencies for these services and mold an engagement letter with a detailed scope paragraph as well as highlighting some of the service areas specifically excluded. 

Here is a sample payroll tax compliance exclusions disclaimer: 

You agree and understand that I will have no responsibility for preparing any payroll tax returns for you and will only review the quarterly payroll tax returns prepared by your third-party payroll tax provider. In addition, I have not made any determination of the status of any independent contractor or the status of any individual(s) retained by you. I will be available under the terms of a separate agreement to provide guidance with respect to independent contractor tax considerations. 

Similarly, here is how a sample nexus disclaimer could read: 

From the information you provide to us, our firm will prepare [INSERT YEAR] federal and state corporation/partnership income tax return(s) for the state(s) of [INSERT SPECIFIC STATE(S)]. This firm is responsible for preparing only the returns listed in the preceding sentence. Please note that if your corporation/partnership has an income tax filing requirement in a given state but does not file the required income tax return, it is possible that the nonfiling could have adverse ramifications, including (i) an unlimited assessment statute of limitations and (ii) inability to claim net operating losses or other tax attributes on any future years’ income tax returns. 

If your business has any operations in states other than those specifically listed, you are responsible for providing our firm with all the information necessary to prepare any additional applicable state(s) income tax returns, such as the identity of all states in which XYZ Corporation/Partnership does business and the extent of business operations in each relevant state. Any additional state tax returns prepared will be done as a separate engagement.  

Alternatively, under a separate engagement, using gross sales, payroll, and other data provided by you, our firm can perform an investigation to determine each state where the XYZ Corporation/Partnership has an income tax return filing requirement. Please inform our firm if you would like to have such an investigation performed 

Assessing Competency 

As part of any client acceptance and continuation policy, assessing your firm’s competencies is always a best practice and strongly recommended. Assessing competency, though, isn’t just a risk management strategy; it’s required under professional standards.  

Here is an excerpt from the AICPA code of conduct: 

CPA professional standards for assessing competency are defined by the AICPA Code of Professional Conduct and augmented by specific standards for various service lines. A CPA must only accept professional services that they or their firm can complete with professional competence, meaning they must possess the necessary knowledge and skill.  

Competency is evaluated through a combination of education, experience, lifelong learning, and professional judgment. It is an individual responsibility for every CPA to assess their own competency before accepting an engagement.  

Many CPA professional liability claims have their origin in competency violations. CPAs should habitually assess the scope of a service, the time to complete the engagement, and the industry in which the client conducts business.  

For example, if the deliverable is fraud detection for a closely held family restaurant, the CPA should have fraud detection skills, the ability to assess the time to complete the engagement, and familiarity with fraud detection in the restaurant industry. Relevant accreditations, such as the CFE designation, may help in your assessments.¹ 

Engagement Letter Disclaimers 

Too often, engagement letters include a detailed scope of practice caveats, yet there is little effort put into disclaimers. Here are a few examples to consider. 

CAS bill-paying letter with no disclaimer for insurance bills. If these bills go unpaid as a result of the client failing to supply the bill, there could be subsequent insurance policy lapses. A disclaimer could have allowed for a netter defense by the insurance company council. 

CAS services for client registration in various states resulting from potential nexus requirements. A disclaimer would detail exactly which states the client has identified as potentially requiring registration, insulating you from the client’s own lapses. 

CAS services for monthly cash-flow statements. A client may provide the cash-flow statements to a potential investor, who then relies on the statements. Subsequently, the company suffers financial distress, and the investor sues the CPA. A disclaimer explaining the limitation on use and distribution of the statements would have been critical to the CPAs defense. 

These few examples demonstrate how clear and relatively simple disclaimers can be in setting up effective caveats in defending claims. 

Conclusion 

Similar to many CPA services that generate significant fees, CAS has the potential for legal liability. Carefully managing client expectations, assessing the firm’s competency to provide such services, and employing strong engagement letter disclaimers will positively position the CPA in the event of litigation. 

¹ See, Christopher Mella and John F. Raspante, CPA, MST, CDFA, “Accreditations and Designations for the Practicing CPA: Friends or Foes?” CPA Journal (March 2017).   

John F. Raspante, CPA, MST, is director of risk management at McGowan Professional in the New York metropolitan area. He can be reached at jraspante@mcgowanprofessional.com. 

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.