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How to respond to a malpractice claim.

It's important that CPAS know the legal theories behind malpractice litigation, use defensive accounting practices and have competent, effective defense counsel. These aren't the only requirements for a successful lawsuit defense, however. CPAS' informed and immediate responses to actual and potential claims are equally important.

Unless practitioners have been involved in malpractice litigation, it's unlikely they'll know how to react to a claim. The 10-step plan in this article guides CPAS through the process, from the first claim notice to settlement or judgment, and offers suggestions on how to respond at each stage. NOTIFY THE CARRIER

CPAs' malpractice carriers and personal attorneys should be told immediately of all situations likely to cause malpractice exposure, first by telephone or personal visit and then in writing. In addition to actual claims, the following occurrences should be reported to insurers because each could develop into a claim:

* Substandard accounting services are performed, even if the CPA is the only person aware of them.

n A client knows of substandard services and brings them to the CPA'S attention but doesn't suggest a claim will be brought.

A claim may come as a verbal declaration, letter, memo or summons and complaint by a client or third party. The insurer can be notified of a claim directly or through the insurance agent or broker. CPAS should provide all documentation included with the notice. Malpractice policy terms stipulate notice requirements; absolute compliance is necessary. Failure to provide prompt notice of claims could violate the policy and void coverage.

Early notice of a claim to the insurance carrier

* Results in the insurer's timely confirmation of coverage, assignment of counsel, prompt investigation and retention of experts (when it appears an actual claim will be made). It also establishes early attorney-client privilege.

* Better enables defense attorneys to obtain and protect records and ascertain facts. Lawsuits have been lost or compromised through destruction of important documents by someone who was unaware of their significance.

* Allows a more informal approach to document review, information requests and claim resolution. Some claimants are more willing to settle when legal expenses have not yet escalated and battle lines have not become entrenched. Moreover, once a complaint is filed, the defense becomes more structured and is restricted by discovery and procedural requirements.

* Enables the insurer to establish immediate contact with the claimant and receive claim-related information.

Also, the claim date and carrier notification date are important in "claims made" policies for triggering coverage and identifying the policy under which the claim is brought.

It is only natural for professionals who take pride in their work to experience everything from guilt and depression to betrayal and anger when sued by a current or former client; however, the worst response is not to take immediate action once a claim is brought. LIMIT COMMUNICATIONS WITH THIRD PARTIES

Practitioners should inform others of a claim only on a need-to-know basis. Internal discussions or written communications about the claim should be avoided unless directed by counsel. This applies to staff, clients, family, friends and members of the press. Only an attorney's involvement keeps communications privileged.

Moreover, practitioners shouldn't make statements about the engagement, admit liability or reveal the existence and amounts of insurance coverage. Statements such as "My insurance company will take care of everything" and offers to pay damages can be used against CPAS and may void coverage.

Senior partners should oversee all actual and potential claims and work with the insurance broker and carrier. If the firm has no risk manager, responsibility should be assigned for overseeing claim progress, coordinating communications and assembling and safeguarding documents as directed by counsel.

Firm managers should identify all current and former firm members involved in the engagement and inform them the firm is the subject of litigation. This should be done before the claimant's attorney contacts them. CPAS should ask all staff involved to

* Discuss no aspects of the engagement or claim with anyone under any circumstance.

* Refer all inquiries to defense counsel.

* Be available to counsel to answer any outstanding engagement-related questions or participate in discovery.

The CPA-client relationship usually ends before or with a malpractice claim. In rare cases, a client who does not consider his or her loss substantial and who has an unusually strong relationship with a CPA may want to maintain the business relationship. CPAS who accept this decision should maintain professionalism, adhere strictly to defensive practices and never discuss the claim with the client.

RESPECT LEGAL BOUNDARIES CPAS should not contact the client or client's attorney to attempt settlement, make statements, release documents, probe into the facts of the claim or begin an investigation without counsel's approval and participation. Most malpractice policies require CPAS to cooperate with defense counsel; priority should be placed on working with counsel to defend the claim.

Any statements made or documents released independently by CPAS can be used against them and may give the appearance of liability, particularly in settlement attempts. Any internal memos about the claim should be cleared with counsel before they're created and reviewed by counsel once they're created. Information uncovered or conclusions reached without counsel's involvement are outside the attorney client relationship and thus discoverable by the claimant's attorney. REVIEW AND PRESERVE DOCUMENTS

With the help of counsel and appropriate staff, CPAS should collect and examine all documentation, such as working papers, financial statements, reports (including those pertaining to peer reviews), correspondence, documents on staff evaluation and supervision and file notes on the engagement and claim. This process allows CPAS to detect any deviations from professional standards and firm or industry policy and to become reacquainted with all aspects of the engagement. Firms also should identify and obtain in discovery all information and documents held by the claimant.

Relying on written statements in discovery or testimony could lead a judge or jury to conclude the CPA isn't familiar with all aspects of the engagement. The CPA who worked on the engagement should identify all pertinent material for the defense attorney's review and for discussion between CPA and attorney. All communications and conclusions between CPA and attorney, as well as the fact that research into the engagement occurred, are protected by the attorney-client privilege.

All firm members should understand that alteration or destruction of engagement-related records after a claim has been brought will anger the judge or jury, hurt the defense of the claim and damage the CPA'S credibility. In addition, discrepancies between the accountant's and the client's copies of documents can be detected.

Records should be altered only if a CPA is directed by counsel and if the changes are dated and initialed and counsel's instruction to do so is documented. However, even then these alterations can hurt a CPA'S credibility. It may be a better idea to prepare notes, with counsel's knowledge and approval, about previously undocumented conversations and accounting issues related to the engagement.

COLLABORATE WITH COUNSEL CPAS should meet with the attorney appointed by the insurer to ascertain facts and discuss possible defense strategies. The best defense can be prepared only when partners and staff cooperate fully with counsel. CPAS' responsibility in this regard begins with the first claim notice and continues until settlement or judgment. Defensible or minor malpractice claims could be lost or result in a higher-than-necessary settlement solely because the CPA and attorney failed to communicate throughout the defense or because the CPA failed to give full attention to the claim.

CPAS may be distracted from defense efforts by the demands of maintaining their practices and responding to client needs. The best step is to recognize the importance of pending malpractice litigation and try to delegate routine firm responsibilities to ensure a stronger, more organized defense.

CHRONICLE THE ENGAGEMENT With the attorney's help, CPAS should write a candid, chronological account of the engagement, beginning with the first client consultation and ending with the assertion of the claim. Documents, such as bills, telephone logs, diaries and memos, help reconstruct events. CPAS must be absolutely honest and objective. Since the defense attorney is involved in its creation, the history becomes a privileged attorney-client communication, even if the attorney shows it to insurance company representatives.

This process also helps apprise defense counsel of the facts of the claim and the reasons for the CPAS' opinions on engagement-related issues. Defense counsel needs complete disclosure of all facts and circumstances of the claim so quality services can be recognized, questionable ones explained and a defense prepared. Attorneys can more successfully defend claims when CPAS inform them of facts detrimental to the case early, when there is still time to prepare an appropriate response.

ASSIST IN EXPERT SELECTION

Practitioners can use their knowledge to help counsel decide if expert witnesses are needed, identify and screen candidates and prepare experts in advance of deposition or trial testimony.

Qualities to look for in an expert include impressive academic credentials and professional experience, as well as the ability to communicate clearly yet intelligently, and to credibly explain any shortcomings in the CPAS' services. General guidelines on expert witnesses include:

* Avoid using friends or colleagues. The claimant's attorney will question relationships that may affect witness objectivity.

* Attend depositions of the claimant's experts. CPAS can watch for erroneous testimony or overly technical, unnecessary terms intended to confuse the attorney and can help identify issues or raise questions. In addition, the claimant's expert may be less critical of someone seated across from him or her. APPROACH SETTLEMENT NEGOTIATIONS WITH CARE

Defense counsel should carry out all settlement negotiations. When CPAS believe they have performed quality services, a decision on settlement can be especially difficult. Concerns about professional reputation and the settlement's effect on premiums and on future chances of obtaining malpractice coverage all come into play. However, a settlement may be appealing when weighed against the risks of a high judgment, the cost and stress of a trial and the time taken from firm responsibilities.

Settlement is almost always preferable to judgment, even when quality services were provided, if

* The quantifiable and unquantifiable defense costs surpass any litigation advantages.

* The engagement is not sufficiently documented to demonstrate quality services were performed.

* The accountant would make a poor witness.

CPAS should carefully consider defense counsel and insurance company recommendations. They will be able to address CPAS' concerns about the advantages and disadvantages of settlement and trial. In addition, most policies in which settlement is contingent on CPA consent may stipulate that if the accountant doesn't accept a settlement recommended by the carrier and the claim proceeds to trial, the accountant is personally liable for any judgment exceeding the recommended settlement.

PREPARE FOR TESTIMONY CPAS should be thoroughly prepared for deposition and trial testimony. They should consider whether they could have done anything differently and, if so, what. Why was a particular choice made or not made? A useful idea is to identify other possible approaches and reasons they were not taken. Claimant's counsel will be sure to explore these issues.

During deposition and trial, CPAS should present themselves as credible, competent, likable professionals. Accountants' attire, demeanor and speech are all important. Pompous, indignant and uncooperative behavior will only reinforce the negative image the claimant's attorney is trying to convey. Listening to the judge and being courteous, cooperative and direct when responding to questions, particularly during trying cross-examinations, will impress the judge and jury. CPAS' responses to questions should de directed to the judge and jury and not to counsel. They should remain cooperative throughout testimony so the jury can see they are confident and professional even when their work is being subjected to scrutiny.

ATTEND THE TRIAL CPAS should be present throughout the trial. Dutiful attendance tells the judge and jury the practitioners are concerned about the former client's interests, their own reputation and the judicial system. The CPAS' absence may create an image of practitioners who do not place a high value on professional services, clients or reputation; a judge or jury could infer the engagement didn't receive the necessary time, attention and care. This rule holds true even when the usual practice demands are especially pressing or a long trial is expected. Other responsibilities should be delegated to firm members.

A STRONG DEFENSE

A malpractice claim against a CPA can be devastating emotionally, but it needn't always have a permanent professional or financial impact. Practitioners who know what steps to take after a claim is brought are in the best position to defend themselves successfully against possible malpractice litigation.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Murray, Mark F.
Publication:Journal of Accountancy
Date:Mar 1, 1992
Words:2067
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