It's Lawyers Vs. Accountants

January 30, 2006
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GRAND RAPIDS — This scenario, perhaps best described as a cautionary myth, surfaced in relation to accountants’ professional liability insurance.

Here is a newly bankrupt construction firm, the result of grossly mismanaged finances. Somewhere outside of the picture is a bonding agent, upset at its loss, with a bulldog attorney ready to recoup some client losses, for a healthy commission.

Repeat after me, says the plaintiff attorney to the bankrupt businessman, “My accountant said …”

Now, if there was any lesson in the Enron/Arthur Andersen disaster, it is that behind every collapse of a guaranteed financial statement there is a CPA firm with a red face and a big insurance policy.

“People always look for a deep pocket when they have a loss,” said Jon Chism, audit partner at national CPA firm Plante & Moran in Grand Rapids. “And so, if a company goes into bankruptcy or goes out of business, one of the first places they look to is the outside accounting firm.”

Buiten & Associates agent Brian Mattila writes policies for a number of CPA firms. His first and foremost concern for these clients is a version of professional liability coverage known as “errors and omissions” insurance.

“Think about a CPA: They’re handling numbers, facts and figures, tax returns and finances and everything,” Mattila said. “If he screws up somehow — an error — or he doesn’t do something he’s supposed to — that’s an omission — he’s not doing his professional duty in servicing that account.”

This is a rapidly growing product, Mattila said. The industry itself is growing, while many attorneys are emboldened by the scandals of recent years. Even in a case of clear innocence, a CPA may still be defending himself or herself in court.

“It’s the litigious society we live in,” Mattila said. “It’s pretty easy to sue someone; just call Sam and here we go.”

Dick Kay, a civil trial attorney at Varnum Riddering Schmidt & Howlett LLP, has defended accountants against audit malpractice claims.

“They’re being sued more,” he said. “All professionals are seeing a rise in the number of claims brought against them. First you had the doctors get hit; accountants and lawyers have come along slower.”

According to a 2002 report from the American Institute of Certified Public Accountants, audit malpractice accounted for only 16 percent of accountants’ errors and omissions claims from 1996 to 2001.

Tax practice represented 60 percent of claims, and was far less costly. Third parties, including lenders, made 30 percent of those claims; 28 percent involved bankruptcies, which also tended to be the most costly.

In today’s atmosphere, however, many of these suits are likely to be downright frivolous — the professional equivalent of the court-day neck brace.

“From what I’ve seen, accountants are less likely to be sued now,” said Joe Godwin, an associate professor of accounting at Grand Valley State University. “It used to be that the accountant was the only one you could get any money out of. But now, they’re scrubbing down those books pretty good, and I think they have a little more backbone.”

Accountants who prove they followed relevant standards won’t be attractive targets for litigation, Godwin argued.

“They’re very concerned about litigation today, as they should be,” he said. “But SOX gave them the background to stand up to clients and say, ‘No, it needs to be this way.’”

Most firms, Chism explained, screen clients for risk factors, including strength of company, aggressive behavior or “any other motivation to mess with the books.”

“Any CPA worth his salt would walk away,” Mattila said.    

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