Malpractice defense checklist.

CPA firms of any size have a 5% to 10% chance of being sued for malpractice in any one year. The best defenses are a high-quality practice, thorough client evaluations and adequate professional liability insurance. In addition, all firm members should be aware of some prudent steps to avoid malpractice exposure:

* Use engagement letters that explicitly define the nature and terms of the services to be provided, the purpose of the engagement and the distribution of the report.

* Be selective when choosing clients and avoid those with high-risk characteristics. These include financial or organizational difficulty, involvement in illegal or possibly illegal activity, unreasonableness or uncooperativeness, fee pressures, frequent involvement in litigation, refusal to sign engagement and representation letters and weaknesses in or absence of internal controls.

* Recognize particularly hazardous engagements requiring unusual care, training and expertise. Examples are those involving new financings and divorce proceedings (specifically valuations of community property) as well as financial institutions, Securities and Exchange Commission filings, regulated or high-risk industries and tax shelters.

* Accept only engagements the firm is qualified to perform or can perform using outside specialists.

* Prepare and document all workpapers as if they were to be presented in court.

* Never sue for collection of fees unless the suit is based on a promissory note.

* Use management letters to recommend corrections of deficiencies in clients' internal control systems. Repeat the recommendations if conditions aren't corrected.

* Deliver reports only to clients and limit discussion of the engagement with third parties.

* Never represent or advise both parties in any transaction or even give the appearance of doing so.

* Retain a firm attorney and consult him or her regularly.

* Require clients to post fidelity bonds for client employees who have access to company funds.

* Trust your professional instincts. If, despite all defensive measures, you continue to feel uneasy about a prospective client or engagement, reject it.