Professional Liability Insurance Program/CNA Claim Database 2014 4% Underwritten by Continental Casualty Company 7 Claim Data

.School of Risk Control Excellence

Accountants Liability: Raise Your Risk IQ 2 Disclaimer

The information, examples and suggestions presented in this material have been developed from sources believed to be reliable, but they should not be construed as legal or other professional advice. CNA accepts no responsibility for the accuracy or completeness of this material and recommends the consultation with competent legal counsel and/or other professional advisors before applying this material in any particular factual situations. This material is for illustrative purposes and is not intended to constitute a contract. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice. CNA is a registered trademark of CNA Financial Corporation. Copyright © 2015 CNA. All rights reserved. 3

Tax and Related Services 4 Agenda

. Claim data . Tax quality control . Frequent or high dollar exposure claims – Advising on international matters – Multi-state filing obligations – Providing “off the cuff” advice – Acting as a trustee or executor of a will or estate . Bundled services

Claim Data 6 Claim Data

2014 Tax Planning and Compliance Claims by Cause of Loss Other 3% Failure to Failure to Detect Theft or Advise / Fraud Improper Tax 4% Advice Unauthorized 55% Practices 10%

Math and Filing Errors Clerical Errors 24% Source: AICPA Professional Liability Insurance Program/CNA Claim Database 2014 4% Underwritten by Continental Casualty Company 7 Claim Data

2014 Tax Planning and Compliance Claims by Type of Return

Individual 42%

Business - Service Provider 35% Other 3% Trust/Estate 1% Business - Other 19% Source: AICPA Professional Liability Insurance Program/CNA Claim Database 2014 Underwritten by Continental Casualty Company 8

Tax Quality Control 9 Tax Quality Control

. AICPA Tax Quality Control Guide . Document policies and procedures and quality controls in written manual . Conduct annual training for staff 10 Tax Quality Control Agenda

. Relevant ethical requirements . Tax-specific acceptance and continuance considerations . Engagement performance . Monitoring 11 Tax Quality Control

. Elements of a system of quality control – Relevant ethical requirements • AICPA Code of Professional Conduct • AICPA Statements on Standards for Tax Services • Circular 230 • Internal Revenue Service • State Boards of Accountancy • Other regulatory agencies – Client confidentiality • IRC §7216 requires client’s written consent to release information to anyone other than the taxpayer – Conflicts of interest • Circular 230, §10.29 12 Tax Quality Control

. Acceptance and continuance considerations – Client integrity assessment • Client’s reluctance to amend tax returns • Client’s refusal to file income or sales tax returns in states where nexus exists – Engagement and firm considerations • Compare firm’s strengths to client’s needs • Engagement team should be able to identify issues requiring further research – Resources to expand knowledge • Continuing professional education • Consider engaging/referring an expert • Gain sufficient knowledge to monitor work of engaged expert 13 Tax Quality Control

. Engagement performance – Circular 230 §10.33, Best Practices for Tax Advisors – Communicate clearly with client regarding terms of engagement • Underutilized in tax services 14 Tax Quality Control

. Engagement performance – Signed engagement letters • Tax compliance • Tax consulting and planning • Representing clients in tax audits 15 Tax Quality Control

. Engagement performance – Tax advice best practices • Establishing relevant facts, • Evaluating reasonableness of assumptions or representations, • Relating the applicable law to the relevant facts, and • Arriving at a conclusion supported by law and facts • Advising the client regarding the import of conclusions 16 Tax Quality Control

. Engagement performance – Tax advice – additional recommended practices • Documenting information provided by client and research performed • Providing all advice in writing  Cite information provided by client, supporting points and authorities 17 Tax Quality Control

. Engagement performance – Organizers – Checklists 18 Tax Quality Control

. Organizers – Obtain completed and signed tax organizers – Written means of communication between client and CPA • Evidence and acknowledgement of client’s representations

19 Tax Quality Control

. Checklists – Highlights • Tax issues • Planning opportunities • Concerns – Training firm professionals on checklists – Firm checklist policy

20 Tax Quality Control

. Engagement performance – Thorough review process is recommended – Consider for: • Transactional work • Tax planning 21 Tax Quality Control

. Engagement performance – Review process • “Big picture” review • “Tick and tie” review 22 Tax Quality Control

. Engagement performance – Docket system • Date received • Preparer • Reviewer • Date sent to client for electronic signature • Date electronically filed 23 Tax Quality Control

. Monitoring – Compliance with quality control policies and procedures – Post-tax season wrap-up meeting – Tax quality control inspections • High risk engagements  Businesses with international and multi-state filing obligations  Initial and final year tax returns  Complex partnership returns • Variations from written policies and procedures and inconsistencies should be identified, explained and documented • Significant deficiencies and noncompliance should be reported to management with recommendations for corrective actions 24 Tax Quality Control

. CNA Resources – www.cpai.com – Tax Quality Control – A Risk Control Perspective (policyholders only) – Identifying “Problem” Tax Clients – Is This Client the Right Fit for Your Firm?, Journal of Accountancy – The Importance of Tax Quality Control, Journal of Accountancy . AICPA Resources – www.aicpa.org – AICPA Tax Practice Quality Control Guide – Annual Compliance Kit (Tax Section members only) – Advising Clients Regarding Erroneous Tax Return Positions, The Tax Adviser 25

Complex and Emerging Issues 26 Complex and Emerging Issues

. Claim allegations – Failure to provide appropriate standard of care – Failure to advise clients about filing obligations or planning opportunities – Provision of improper tax advice

27 Complex and Emerging Issues

. U.S. filing responsibilities related to foreign operations (foreign interests) . State and local sales, use, property and other taxes . Tax law changes

28 Complex and Emerging Issues

. Foreign interests – FBARs – 5471s – 5472s – 3520s – Transfer pricing – Interest stripping rules – U.S. withholding on payments to foreigners 29 Complex and Emerging Issues

. State and local issues – States aggressively pursuing out-of-state taxpayers • Additional filing obligations in other states • Sales and use tax – Scope definition in engagement letter • Identify returns to be prepared 30 Complex and Emerging Issues

. State and local issues – Claims tend to be large • Statute of limitations does not begin to run • Underpayment penalties and interest charges accrue rapidly • Exposure to double taxation • Responsibility for unpaid sales tax

31 Complex and Emerging Issues

. Tax knowledge – Current law – Regulations and tax law interpretations 32 Complex and Emerging Issues

. Knowledge of the area – Complete CPE appropriate for CPA firm’s clients – Inadequate training targeted to discredit CPA’s competency – Newsletters aimed at professionals – Training resources • AICPA • State CPA Societies • For-profit CPE providers • Graduate level tax classes

33 Complex and Emerging Issues

. Blogs, LISTSERV© email lists and soliciting other CPA’s opinions – Not a substitute for comprehensive research

34 Complex and Emerging Issues

. Keep clients informed of emerging issues – Client newsletters • Retain client distribution lists

35 Complex and Emerging Issues

. Due diligence – Client inquiry • Document responses in workpapers – Review • Web site • Social media • Other marketing materials

36 Complex and Emerging Issues

. Inform client of: – Issues – Opportunities . Document discussions in workpapers . Notify client in writing of potential tax filing obligations – Consider duty to investigate if performing financial statement services . Foreign investment considerations – Client sign-off regarding foreign bank and financial accounts

37 Complex and Emerging Issues

. Written tax advice – Specify date of advice – Based on information provided – No responsibility to update advice

38 Complex and Emerging Issues

. Working with experts – Sufficient knowledge of the area to review the expert’s work 39 Complex and Emerging Issues

. Working with experts – When engaging expert or providing referral • Conduct advance inquiry regarding work quality • Review returns for accuracy prior to filing . When client needs have outgrown firm expertise – Walking away – Serving as a referral source 40 Complex and Emerging Issues

. CNA Resources – www.cpai.com – CPA Responsibility With Respect to Client Reporting of Foreign Assets – A Second Look (policyholders only) – DOMA and Related Malpractice Risks (policyholders only) – Drawing the Line: Providing Tax Advice Related to the Affordable Care Act, Journal of Accountancy – The Tip of the Iceberg: Professional Liability Claims and International Taxation, Journal of Accountancy – Managing Risks in International Tax Engagements

Off the Cuff Advice 42 Off the Cuff Advice

. I’m thinking about investing in this entity, what are your thoughts? . What would happen if I sold this investment? . What would happen if I opened a location in another state? . How much do you think my business is worth? . If I contribute this piece of real estate to a charity, what deduction will I get? . Should I make estimated tax payments? 43 Off the Cuff Advice

. Engagement letter provisions – Advice cannot be relied upon unless requested and provided in writing – Tax planning available as an additional service • Consider new engagement letter for complex matters  Clear description of subject of tax planning matter 44 Off the Cuff Advice

. Documenting discussions – Consider written correspondence for client specific facts and circumstances – Consider notes to the workpapers for general questions 45 Off the Cuff Advice

. Prospective clients – Include disclosure that additional facts and research will be required if engaged . Family and friends – Refrain from advising if they are not a client 46 Off the Cuff Advice

. CNA Resources – www.cpai.com – Effective Communication: The Best Medicine to Avoid Litigation? – Avoiding Allegations of Improper Tax Advice, Journal of Accountancy – Write it Down: The Importance of Documenting Oral Advice, Journal of Accountancy . AICPA Resource – www.aicpa.org – SSTS No. 7 – Form and Content of Advice to Taxpayers

Related Services 48 Claim Data

2014 Accounting Services Claims by Cause of Loss Improper Advice/ Failure to Advise Computational/ 34% Mathematical Error 33%

Failure to Detect Theft or Fraud 11% Other

22% Source: AICPA Professional Liability Insurance Program/CNA Claim Database 2014 Underwritten by Continental Casualty Company 49 Bookkeeping and Bundled Services

. Failure to detect theft – Define scope and limitation of services within engagement letter. 50 Bookkeeping and Bundled Services

. Failure to detect theft – Engagement letters • Separate engagement letters or • Address services separately – Engagement letter provisions • Services not designed to detect theft or fraud • Client responsibilities  Internal controls  Review and approve CPA’s work

51 Bookkeeping and Bundled Services

. Discuss potential evidence of theft with: – Senior management – Those charged with governance . Document conversation in written communication . Place professional liability insurance carrier on notice . CPA should not investigate themselves . Inform client management in writing of obvious internal control weaknesses

52 Bookkeeping and Bundled Services

. Failure to advise – Engagement letters • Advice cannot be relied upon unless it is requested and provided in writing – Describe additional service recommendations to client in writing • e.g. analysis and recommendations regarding internal controls 53 Bookkeeping and Bundled Services

. Handling client funds: implementing controls – Background checks – Segregation of duties – Physical security/dual authorization – Client oversight responsibilities • Review and approval of invoices for payment • Periodic review of transactions processed • Review and approval of new vendors – Consult with insurance agent on coverage for employee dishonesty 54 Bookkeeping and Bundled Services

. Trust fund taxes – CPA instructed not to remit in times of financial hardship – Can result in imposition of significant penalties – Inform client of consequences in writing • Responsible parties • IRC §6672, Trust Fund Recovery Penalty – Consider withdrawing from the engagement • Does client continue to meet the firm’s ideal client profile?

55 Acting as a Fiduciary

Source: AICPA Professional Liability Insurance Program/CNA Claim Database 2014 Underwritten by Continental Casualty Company 56 Acting as a Fiduciary

. Fiduciary – Executor or trustee – Higher standard of care • Duty to equitable titleholders of the corpus 57 Acting as a Fiduciary

. Claim factors – Beneficiary concludes their interests not fairly represented – Scrutiny of decisions made: • Should an asset have been sold, or was it sold at the appropriate time? • Was an investment appropriate? or • Were assets distributed appropriately? – Fiduciary put their interest ahead of beneficiaries • Charging exorbitant fees • Other alleged self-dealings

58 Acting as a Fiduciary

. Engagement acceptance – Identify potential conflicts of interest • Did the CPA firm set-up the trust? • Does the firm provide services to beneficiaries? • Consider declining engagement if conflicts cannot be resolved – Consider written disclosure of potential future conflicts of interest – Consider the need: • For client consent prior to disclosing confidential information • To obtain signed conflict waivers 59 Acting as a Fiduciary

. Engagement acceptance – Identify potential conflicts of interest – Examine beneficiary relationships • Encourage client to:  Discuss final wishes with interested parties  Ensure final wishes are clearly stated in all: - Wills, trusts and related documents - Oral or video records which discuss directives 60 Acting as a Fiduciary

. Engagement acceptance – Assess requisite training and skills to provide services • Does the will or trust document provide authority to hire experts? – Retain legal counsel to review documents prior to accepting role • Clear definition of:  Testator’s intent  Trustee’s instructions and responsibility  Authority of the fiduciary • Compensation • Circumstances under which fiduciary may withdraw

61 Acting as a Fiduciary

. CNA Resources – www.cpai.com – Fiduciary of a Trust or Estate? Consider This – Accountants’ Fiduciary Liability . AICPA Resource – www.aicpa.org – The CPAs Guide to Financial and Estate Planning

Claim Reporting 63 Professional Liability Insurance

. Claim definitions defined in policy . Policy conditions – Notice requirements for claims and potential claims

64 Professional Liability Insurance

. Claims made and reported basis – Report claims and potential claims to trigger coverage . Other reporting provisions . Review policy with insurance agent or broker to understand reporting requirements

65 Tax Services Example

. Notify insurance carrier of potential claims . Elements of written notification – Firm name and insurance policy number – Client name – Services provided (area of practice and date provided) – Firm contact name and phone number – Date you first became aware of the potential claim – Brief description of circumstances giving rise to potential claim . Notification within policy period 66 Financial Statement Services Example

. Duties in the event of a claim or potential claim . Consult your insurance agent or broker – Pre-claim assistance – Subpoena assistance