5 Takeaways From the Carlock Copeland 2017 Accounting Risk Program in Nashville, TN

1. Cyber Insurance is cheap and important to protect against risks not covered by E&O. Work with a knowledgeable broker and insurer and buy the coverage because the risk is real and growing.

2. Make sure your engagement letter includes:
• a specific description of the work you will do;
• limitation of damages provision where not precluded by standards;
• indemnification where not prohibited by standards;
• disclaimers where appropriate ( i.e. AUP’s);
• jurisdiction, venue and choice of law provisions; and
• a provision for the client to pay for time and expense you incur for subpoena compliance.

Watch out for client changes including cyber representations and indemnifications of any kind.

3. Evaluate the risk to your firm before responding to subpoenas or document requests.  Consultation with your insurer or outside counsel may be time well spent.  The risk runs from minimal to existential and different risks require different responses.

4. You save money by not engaging with bad clients.  Red flags include:

• financially stressed or unprofitable  clients;
• clients whose work you are not really equipped to handle;
• clients whose interests conflict with other clients; and
• clients who lack management integrity.

These all should be evaluated for disengagement. Consider firing  your bottom 5 or 10% and investing those resources into developing better opportunities.

5. All of us have clients who present some special risk.  Do what you can to mitigate that risk with:
• thorough client acceptance procedures;
• engagement letters;
• robust conflict analysis; and
• continuous reevaluation.

Employ detailed financial management including precise billing entries, timely billing and early AR follow-up in order to spot problems quickly.

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SAS No. 133: Exempt Securities and a New Audit Standard!!

As public offerings have gotten more complex and expensive, capital has flowed to non-public securities.  Consequently, the exempt securities market has expanded and increased in complexity and risk.  Issued on July 27, 2017, SAS 133 is intended to provide guidance to bring auditing consistency across offerings and increase public confidence in the presentation of financial information.

Beginning with offerings made in June 2018, this new standard will apply when audited financials are used in connection with exempt securities offerings.  Common exemptions involve private placements, municipal securities, not-for-profit securities, new crowd-funding and Regulation A offerings, and franchise offerings.  Thus, heightened audit procedures will be the rule rather than the exception, applying in some form to both private and public capital raising efforts.

SAS 133 will apply when an auditor is “involved” in an exempt offering.  Being involved has two components: (1) the auditor’s report is included or referenced in the exempt offering document and (2) the auditor performs specific activities with respect to the offering document like reading the offering materials, offering a comfort letter, or agreeing to allow the use of the report in connection with the offering.  These requirements are designed to protect auditors from fallout from the use of their audits in connection with exempt offerings without their knowledge.
Among other things, SAS 133 will import the requirements AU-C Section 720 regarding “other information in documents containing audited financial statements” and AU-C Section 560, which requires auditors to consider whether events after the report would cause the auditor to revise the report.

This new auditing standard will require auditors to pay attention to two related developments.  First, auditors will have to be more attuned to which transactions count as securities.  For example, the SEC recently decided that offering cryptocurrency is a securities offering requiring registration or exemption.  Second, auditors will have to consider how closely to hue to GAAP and the FASB’s auditing standards, which are not yet mandatory but do influence how disappointed investors seek redress for failed investments.  For more information on non-GAAP accounting and the state of the industry, see our video here.

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Sometimes You Shouldn’t Settle

Billy Newcomb and I recently won summary judgment for a top 100 accounting firm. A publicly traded company had sued in a Florida court, alleging negligent failure to detect fraud and claiming damages well into eight figures. Six other defendants, including a top 10 accounting firm, settled with the Plaintiff just after suit was filed, leaving our clients as the sole defendants. At court-ordered mediation, the Plaintiff, perhaps a little too confident in its home court advantage, refused to lower its demand under $5 million. Immediately after the mediation failed, the trial court granted summary judgment to CCS’ clients and dismissed all of the Plaintiff’s claims with prejudice.

Billy practiced law in Florida for five years and regularly litigates Florida cases, and he and I have done well in Florida over the years. We felt strongly about our liability and damages defenses and didn’t want to waste our clients’ money on an excessive settlement. Our clients agreed and had the confidence to stand up to the Plaintiff. If early summary judgment had not been granted, Billy and I planned to prevail on another dispositive motion or at trial.

When a Plaintiff makes a reasonable demand, we often recommend settlement to our clients. But, when the plaintiffs are unreasonable, we know how to get a better result at the courthouse.

As Churchill announced:

we shall fight on the beaches,

we shall fight on the landing grounds,

we shall fight in the fields and in the streets,

we shall fight in the hills;

we shall never surrender…

There are no sure things in litigation, but if you want to know what a case is worth, sometimes you must have the courage to fight. We are both very grateful to our clients for their courage in letting us go forward.

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Takeaways from Professional Liability Underwriting Society (PLUS) International Conference 2016

Takeaways from Professional Liability Underwriting Society (PLUS) International Conference 2016:

1.   Law firms fail because of: too much debt, rapid expansion, guaranteed salaries, and/or cultural divides.

2.  We are all expecting a U.S. law or accounting firm to get hit with a Panama Papers style data breach which brings down the firm and probably yields management liability claims as well.

3.   The IRS will continue its attack on captive insurance companies utilized to avoid tax with no real risk transfer.

4.   Mary Jo White will be missed and you might expect the SEC to focus less on Wall Street and more on Main Street in the next four years.

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Bench Trial Victory for CPA Firm

I was fortunate to prevail in a bench trial for a great CPA firm in August and was reminded of these takeaways:

1)  A CPA’s work product will seldom be perfect but good workpapers can save you from many apparent sins.
2)  Identify sources of data in your work product or you may end up as guarantor of data you should not be responsible for.
3)  Smart and highly educated Plaintiffs who exaggerate their claims can be systematically destroyed, but only with a light touch.
4)  Credibility and likeability are critical in a factually complex case and lawyers and CPAs need to begin to establish both on day one of their engagement.
5)  Our trial system is not perfect, but it often yields the right result so defendants should not despair.

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Fighting For Your Professional Life: Accounting and Attorney Malpractice

Defamation claims against lawyers and accountants are on the rise, as noted in the recent Carlock, Copeland & Stair Accounting Risk Management program in Atlanta. That point was highlighted recently when a forensic accountant was sued in Fulton County, Georgia. The facts are complex, but the plaintiff was involved in a failed bank and sued over an allegedly negative reference in a national publication. Accountants and all professionals need to be careful what they say, especially in the press.

Five Takeaways from the Carlock Copeland & Stair Accounting Risk Management Program Presented on May 19, 2016

 1. The Panama Papers, and Big Data in general, demonstrate the risk posed for accountants when clients hide or launder money offshore. An international consortium of major news sources is actively soliciting more leaks and tax officials from 28 countries met in April to plan a joint strategy to mine the Panama Papers for gold. The database lists many U.S. CPA firms and diagrams their relation to various suspect transactions. Governments from Russia to Britain to Argentina have been rocked by the disclosures. Don’t get your firm’s name added to the list and avoid overly aggressive strategies. Protect your own files from those who might like to steal your clients’ confidential information.

2. Professional judgment is what you get paid for, but can also be what you get sued for. Audit engagements in particular require lots of judgment calls. Make sure your firm’s work reflects good judgment and that those who make the judgment calls are properly trained and professionally skeptical. If you have young auditors in the field without onsite partner supervision, talk through the tough issues with them in advance.

3. Read your insurance policies. Policy provisions may be negotiable and you may gain value in ways beyond premium reductions. Be very accurate when filling out your application and compare it to your website. Submitting a neat and accurate application can save you real money. Price should not be your only consideration and you should check to see which carriers treat their clients well.

4. Jurors hold outside accountants to high standards when a client suffers from internal fraud. Take another look at your engagement letters to make sure you have included all the damage limitations and disclaimers the laws allows and avoid engagements where the client’s lack of internal controls creates too much risk.

5. Accountants are getting sued for defamation even when they make statements in good faith and in the course of their clients’ engagements.

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