Laws and opinions about how much assistance CPAs should provide clients in areas of legal services vary by state. But by helping clients with legal forms and documents, CPAs can inadvertently expand their liability exposures and hamper an effective defense – opening the door for plaintiffs to allege grounds for a malpractice claim in some situations. CAMICO recently developed some guidelines on areas where CPAs may need to consult an attorney.

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If you search the Internet for “legal forms,” several website links will appear, offering free downloads and software to anyone who wants to incorporate a business, lease real estate, make a will, draft a loan agreement, issue a promissory note, amend a contract, and many other activities.

Given the climate of seemingly free legal offerings, clients will sometimes ask their CPA to assist them with the preparation of forms and documents as they seek to form or liquidate corporations, partnerships, estates, trusts, or any entity that requires organizational documents. At other times clients will ask for help with documents that pertain to mergers, acquisitions, dissolutions, employment, severance, compensation, or stock option plans.

Professionals in the fields of law and accounting have long debated how much assistance a CPA should provide a client in this area. The pertinent laws differ by state and are constantly changing. For example, a recent court opinion found that CPAs may advise clients as to the appropriate contents of routine, prepared, fill-in-the-blank certificates readily available to the public, provided CPAs inform their clients that assistance of counsel in the drafting of such documents is advisable. (CPAs should also inform clients in writing for documentation purposes.)

Many legal professionals advocate that CPAs and attorneys work together as a team in any complex business situation. That is, attorneys require their clients to have a CPA, and CPAs require their clients to have an attorney.

Effective Legal Defense

By helping clients with legal forms and documents, CPAs can inadvertently expand their liability exposures when they should be trying to limit exposures. Further, an effective legal defense can sometimes be hampered by the CPA helping the client with activity outside the typical CPA functions.

Oftentimes, a plaintiff’s objective is to connect the CPA to a failed transaction, when in fact the CPA may have been only peripherally involved. The CPA will want to demonstrate and prove the limits of his or her involvement in those transactions. In the event of a claim the CPA can then be distanced from the damages. But when the CPA was involved in even simple legal matters, the task of proving the CPA’s limited involvement in the transaction, and whatever damages may have stemmed from it, becomes more challenging.

On top of that concern is the issue of not being qualified or trained to spot potential legal problems. Examples include:

  • corporate documents that are inadequate in preventing alter-ego claims whereby claimants attempt to pierce the corporate “veil” and hold shareholders responsible for debts and damages; and
  • promissory notes that are inadequate and inappropriate when they may be considered subject to securities laws.

CPAs who get involved in what are commonly thought to be legal services might open the door for a plaintiff to allege – likely unfairly – a separate ground for a malpractice claim in some situations, and regulatory consequences may follow.

When working with the impact of laws and regulations, especially those related to taxation, CPAs need to recognize that there are limits to what they can do without crossing the line and inadvertently “practicing law.” Treasury Circular 230 allows CPAs to represent tax clients’ interests before the Internal Revenue Service, which means CPAs may need to: 1) analyze and interpret how tax laws apply to particular client fact patterns; and 2) consult with tax clients regarding the resulting analyses and interpretations.

Many states have adopted Circular 230 as part of their own state regulations. CPAs should consult an attorney, however, when a tax issue involves legal principles that extend beyond tax law, or when any other type of issue or engagement involves legal principles that need to be interpreted for clients.

Guidelines

CPAs may need to stop and consult an attorney when working in the following areas:

  • Legal principles extending beyond assisting and advising the client about tax laws; e.g., partnership issues when the CPA is analyzing obligations created by the partnership agreement, agreements with creditors, and any side agreements among the parties.
  • Issues requiring interpretations of state or local law extending beyond tax law; e.g., partnerships, real estate, estates and gifts, and business valuation issues, especially when family limited partnerships (FLPs) or family limited liability companies (FLLCs) are used. Also, issues presenting a mix of legal, tax and accounting questions; e.g., entity choices and classifications, as in LLCs and LLPs, and estate and gift taxation. When tax issues become intertwined with legal rights (classic examples include wills and trusts), or when there are unusual or irregular proposed interpretations, or competing interests, the CPA should consider asking the client’s attorney for an opinion.
  • Formation or liquidation of legal entities; e.g., corporations, partnerships, estates and/or trusts, or any entity that requires the drafting of organizational documents.
  • Agreements and documents for mergers, acquisitions, dissolutions, liquidations, employment, compensation, stock option plans, or severance.
  • Any consulting services involving a legal component; e.g., compensation and benefits planning, and personal financial planning (PFP) when the formation of trusts or other estate planning/asset protection techniques is involved.

Most states in the U.S. have statutes or regulations covering these areas, and some states have interpretations that are stricter than others. Always check the laws of the state in question.

Clients will sometimes pressure the CPA firm to provide legal services in order to avoid a fee from a law firm, but CPAs who yield to such pressure may ultimately find themselves named in a complaint as the first step toward a lawsuit. The fee received by the CPA for some services is just not worth the exposure to potential litigation.

Ron Klein is vice president – risk management counsel at CAMICO. Ron has been with CAMICO for over 25 years and utilizes his extensive knowledge and expertise of CPA professional liability issues to help CAMICO policyholders practice sound risk management. Copyright © 2012 CAMICO. All rights reserved.

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