Legal Issues for Small CPA Firms

Recently attorney Peter Fontaine spoke to my small firm roundtable group about legal issues relevant to practices of their size.

Fontaine is the founder and Managing Partner of NewGate Partners, a provider of legal services exclusively to the public accounting industry. Peter has served as chief legal counsel for accounting firms for more than two decades.  Before launching NewGate, he was general counsel at McGladrey.  Peter was also a partner at Arthur Andersen, where he managed legal support for its global business consulting practice.

Here are suggestions he had for our group of solo practitioners and 2-3 partner firms:

Writing engagement letters.  Write them in a way that non-CPAs can easily understand.  This reduces the possibility of the client misunderstanding the terms of the engagement.

Arbitration clause.  Make sure this is included in the EL.

“Know your limitations.”  This line was made famous by Clint Eastwood in Magnum Force but it is especially applicable to small firms.  Fontaine says that a big problem in malpractice lawsuits is CPAs doing work they are not competent to do.  Small firms have a tendency to more readily accept any new client or project that walks in the door.  Because they are small firms, their ability to call in other partners with the necessary expertise is greatly limited or non-existent.

Requests from third parties for clients’ information.  Don’t send them directly to third parties (banks, etc.).  Instead, send them to the clients and have them send the information to the third parties.

Non-profit work.  NFP work often comprises a sizeable percentage of small firms’ total revenues.  Yet, it’s fraught with danger.  The malpractice risk is high for small non-profits because (1) they are more susceptible to internal fraud due to their relatively unsophisticated personnel and lax controls and (2) it’s common that small non-profits have an inexperienced, volunteer board.  Have your antennae out for foul odors.

Digital data subject to discovery.  Firms should improve hygiene practices with electronic files.  Delete.  Delete.  Delete.  Also, adopt a document retention and destruction policy and stick to it.

Small multi-partner firms should be more concerned about having a proper partner agreement than large firms.  Sounds counter-intuitive. But the agreements of many small firms are poorly worded.  Rarely are they current or comprehensive.  Lots of issues are left to “trust,” which, when a partner dies suddenly, doesn’t count for much.  Also, as the firm grows by adding partners or merging in smaller firms, the newcomers are often anxious about signing a poorly-written partner agreement.

Part-time and flex-time employees.  These are marvelous win-win arrangements for the firm and the employees.  But it’s critical to consistently follow the firm’s policies in these areas.  Firms should have a written agreement with these employees that follows specific guidelines, what they work on and what is expected.

Computer security issues.  The key for the small firm is to be able to prove that they took reasonable steps to prevent data from being compromised.  Most successful attacks are caused by lax security and data protection, not the prowess of the hackers.

Growth-oriented firms bringing in new partners need legal counsel to make sure everyone’s expectations are clearly addressed. We provide further recommendations in How to Bring in New Partners.