Don't Let Scope Creep Lead You out of Bounds
Almost every sport uses a defined boundary. The playing area, whether it is a football field, basketball court, or baseball diamond, is clearly defined and understood by all athletes who play the game. It is pretty easy to ascertain whether you are in or out of bounds. It's not so simple in the accounting world. Consider these examples: * A large accounting firm had to resign from an audit engagement because a permissible nonaudit service was found to have deviated from its intended scope, causing the auditor's independence to be impaired. The client then brought a claim against the CPA firm to recover fees previously paid to the CPA firm and additional fees incurred to select and hire a new auditor. * Every year, a small CPA firm made adjusting journal entries, reconciled bank accounts, and performed other activities to "clean up" a client's financial records to prepare the tax return. When the client discovered that one of its employees had embezzled funds, the client sued the CPA firm, alleging the CPA should have detected the theft because of its involvement with the client's books and records. * A wealthy individual tax client of a midsize CPA firm sold his business, which resulted in negative tax consequences. The client alleged that the firm failed to give him proper tax advice regarding the sale and brought a claim against the firm. The CPA firm indicated the engagement was for tax return preparation services only, as documented in the engagement letter. However, it acknowledged discussing the sale as a courtesy to the client. Whether it is termed scope creep or engagement creep, it can be challenging to stay within the boundaries of an agreed-upon scope when delivering client services. WHAT'S THE BIG DEAL? Professional liability concerns A significant number of claims asserted against CPA firms in the AICPA Professional Liability Insurance Program include allegations related to a disputed engagement scope. Even if a scope dispute is not expressly alleged, defending a claim can be challenging if the firm's activities were not in fine with the scope described in the engagement letter (if an engagement letter even existed). Often, the scope of service is inadvertently expanded by a well-intentioned CPA trying to deliver good client service. Perhaps the client asked the CPA to "quickly look into something" or wanted to "bounce something off" the CPA. Or, during the performance of services, the CPA realized that additional services, such as bank reconciliation cleanup or the preparation of an additional state tax return, were needed. Acting upon these good intentions may place additional obligations on the CPA, which may be challenged by a plaintiff attorney in the event of a professional liability claim. Financial concerns Often a CPA completes an engagement, reviews the client's unbilled fee balance, and wonders how the balance got so high. It is likely that additional work was performed in an effort to deliver superior service. The CPA profession has established a great service culture. However, this culture can become a double-edged sword and should not be to the financial detriment of the CPA firm. Time is money. If not managed appropriately, supplemental activities outside the original engagement's scope may not only increase professional liability risk, but also may result in write-offs if the client refuses to pay for the additional work. Other "costs" firms often overlook when dealing with scope disputes include lost time spent debating with the client, the aggravation caused by these misunderstandings, and potential reputational damage that may be caused by an unhappy client. These costs exist even if a claim is not asserted. RISK MANAGEMENT TIPS To help stay in bounds, consider the following tips: * Be mindful of whom you let play in your league. Perform proper client acceptance procedures. …