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Tax Services Generate Most Malpractice Claims

by Leroy Baker,, New York

29 December 2005

Findings from a recent claims study conducted by the CAMICO Mutual Insurance Company indicate that well over half of all claims reported by CPAs that are insured by the firm stem from tax engagements.

The study, conducted in October, included the claims experience of all of the insurer’s nearly 7,000 policyholder firms in 44 states, focusing on the major causes and types of claims incurred by CPAs nationally.

According to CAMICO, the second largest provider of professional liability insurance for CPAs in the United States, tax was identified as the most frequent type of claim and largest total of claim dollars for two principal reasons: complexity and continual change in the tax code; and issues regarding the engagement between CPAs and their clients.

"The technical nature of this area of taxation places most of the burden for decision-making on the CPA," observed Ron Klein, vice president of Claims for CAMICO.

"There is usually a limit to how much the CPA can ask the client to decide in technical tax issues. It’s much like a patient seeing a doctor about a serious, complex medical condition; the problem and treatment are so critical that the patient will ultimately go with the treatment the doctor recommends," Mr Klein explained.

Technical income tax issues are the primary area of loss, according to the study. S and C corporation elections are the next most risky, followed by estate planning.

In addition to taxation, other areas identified as high risk by the study included financial statements, investment fraud and defalcation.

Financial statements involving audits, third-party creditors, and occupational fraud are the second highest area of liability risk and usually lead to the greatest financial loss per incident.

The third most frequent area of claims involves investment fraud including accounting services such as reviews, audits, tax and investment advice. Such incidents also lead to heavy financial losses.

Another area causing high losses is embezzlement by client employees, or occupational fraud, which costs US businesses more than $6 billion each year. Defalcation involves a variety of engagement types including all accounting services ranging from bank reconciliation services to audits as well as tax engagements.

According to Klein, CPAs can limit their exposure to claims liability by exercising "professional skepticism".

"Exercising skepticism goes hand-in-hand with the CPA’s ability to detect fraud and to advise and warn clients of weaknesses in their systems of financial control," he noted.

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