Marketing materials and malpractice exposure: advertise what you're qualified to do, not more.

EXECUTIVE SUMMARY

* CARELESS ADVERTISING ASSERTIONS can lead to lawsuits. When a plaintiff's lawyer evaluates a potential accounting malpractice claim, he or she typically will examine all of the advertising materials the CPA provided to the client.

* ADVERTISING THAT CREATES FALSE or unjustified expectations of favorable results is prohibited by law. CPAs who promote a wide range of professional services even though they render some of them rarely--or never--can create problems for themselves.

* CPAs SHOULD AVOID THE PITFALLS of promising more than they can deliver--for example, suggesting a client's "success" is something they can influence, saying they will monitor a client's business or anointing firm members as "experts" when the context is not an expert witness engagement.

* POORLY DESIGNED WEB SITES may juxtapose a firm's list of professional CPA services with links that imply the firm has special expertise in all the practice areas listed. Promotional content on the site should explain how the firm will access the resources to perform listed services competently.

* TO REDUCE RISK FIRMS SHOULD gather objective and quantifiable verification of staff competencies and use the data to develop a list of services the firm is qualified to perform. That information should be the basis for developing advertising and marketing materials.

* A DESIGNATED CPA FIRM PRINCIPAL and firm attorneys should review for accuracy all marketing materials--including advertisements, firm brochures, information posted on a firm Web site, articles, newsletters, handouts and seminar presentation materials--before publication or distribution.

It won't land you in court to exaggerate your firm's competencies in the heat of competing for market share, but it can create problems in defending a malpractice lawsuit. Attorneys for disgruntled clients suing to recover money for losses incurred by bad business decisions often seek evidence they can use to establish a CPA acted as a "manager" of the entity, for example. Practitioners unwittingly aid plaintiffs' lawyers in developing such a case when their advertising copy suggests they can serve as "a key member of the management team" or as "an advocate helping clients achieve success." This article explains how careless assertions in advertising can affect the outcome of lawsuits and gives examples of language to avoid and policies and procedures to follow to keep malpractice exposure from marketing materials to a minimum.

WHAT CREATES LIABILITY?

When a plaintiff's lawyer evaluates a potential accounting malpractice claim, he or she typically will review all correspondence and reports from the CPA as well as proposals, engagement letters, firm brochures, Web sites and ally handouts provided to the client. The attorney examines those materials to determine whether they implied the client would achieve specific results (an increase in profits, for example) rather than receive all engagement deliverable (such as a tax return). Misleading advertising claims, of coarse, are prohibited by professional standards as well as state and federal laws. The Federal Trade Commission Act applies to interstate commerce and encompasses ads that appear on the Internet. The AICPA's Code of Professional Conduct, section 502, states:

"Advertising or other forms of solicitation that are false, misleading or deceptive air not in the public interest and are prohibited. Such activities include those that

* Create false or unjustified expectations of favorable results.

* Imply the ability to influence any court, tribunal, regulatory agency or similar body or official.

* Contain a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee or fee range when it was likely at the time of the representation that such fees would be substantially increased and the prospective client was not advised of that likelihood.

* Contain any other representations that likely would cause a reasonable person to misunderstand or be deceived."

WATCH YOUR LANGUAGE

CPAs who promote a wide range of professional services even though they render some of them rarely--or never--can create problems for themselves. Here are a few examples.

A client that designed and manufactured custom metal work had for several years engaged a CPA firm to prepare its U.S. income tax return and the state income tax return for the state where the client company was located. The firm had little contact with the client. The client did business in multiple states but never advised the CPA of this and did not file tax returns in states where nexus had been established. After state auditors visited the client and assessed substantial taxes, penalties and interest, the client's controller blamed the CPA for the error, hoping to deflect blame from himself. The CPA firm's marketing brochure promoted the firm as "tax compliance experts," and the controller alleged he had relied on the CPA firm to advise the company regarding all tax compliance issues.

In a similar case, a client produced the CPA firm's promotional brochure as evidence. In it, the firm promoted its ability to perform litigation support services, advertising itself as able to assist attorneys and clients whose problem was a "real or apparent lack of data." Besides that rather odd claim, the brochure also said the firm's litigation support professionals had special training in legal procedures. In fact, the practitioner assigned to the engagement had no training or experience in performing litigation support services. At trial a jury awarded $42 million in damages to the plaintiffs, including $27 million in punitive damages based on allegations of fraud through false advertising.

Consider, for example, the following hypothetical promotional statement, which contains elements from actual CPA-firm marketing materials: "At our firm we believe the financial success of any business requires regular monitoring and attention to the smallest detail. Without the objective oversight of a practiced eye, huge opportunities can slip by unnoticed, and minor problems can quickly evolve into significant issues. That's why the experts at our firm maintain a close relationship with our clients all year round, rather than merely reviewing financial records annually."

When a firm advertises itself with such statements, a client's missed opportunity or small problem can blossom into a large one and create significant hurdles to overcome in defending a claim against the firm. For instance, how can the CPA "monitor" the client on a typical annual financial statement and tax engagement? (The answer is that the firm can't and doesn't.) Monitoring also implies the CPA has undertaken management functions, which impairs the independence required in attest engagements such as audits and reviews. The mistakes in that firm's advertising statement show several pitfalls to avoid:

* Suggesting "success" is something influenced by the CPA--it isn't.

* Intimating the firm can monitor a client's business. CPAs typically don't do this. The statement creates unrealistic expectations that a firm can serve as a "watch dog" to ensure the client doesn't overlook business opportunities--a fiduciary duty that properly belongs to the officers of the client business.

* Offering "oversight," which is the responsibility of client management, not the CPA. The word arguably implies that in every engagement, the CPA will undertake duties normally performed by client management.

* Anointing firm members as "experts" when the context is not an expert witness engagement. Even if a firm believes its employees have the requisite skills and experience to be considered experts, it should be cautious. Courts often hold experts to a higher standard of care.

* Suggesting the firm will "maintain a close relationship ... all year round." This implies the CPA is assuming a continuing duty to the client. Although this may be attractive to prospective clients, it can erode a statute-of-limitations defense. For instance, if the client lost the use of a net operating loss because the tax year in which it could be used was closed, the client could allege the CPA had a continuing duty to inform it of the opportunity to carry back the loss even if the client prepared its own tax return for that year. In litigation a plaintiff's attorney could use statements that imply a continuing duty to clients to sustain claims that would otherwise be time-barred.

In another instance of regrettable braggadocio, a firm said in its marketing materials that its tax positions "would withstand an Internal Revenue Service audit." When a client's tax position did not pass IRS muster--resulting in the imposition of substantial tax, penalties and interest--the aggrieved client sought recovery. The case ultimately was dismissed based on untimely fling of the complaint, but the firm recurred substantial defense costs. Why did those firms make statements that could come back to haunt them? Perhaps a marketing consultant wrote the ad copy and it was not reviewed before publication either by the firms' management or their attorneys.

PITFALLS TO AVOID

Don't allude to third-party use. Materials suggesting your work product can be relied on by lenders, investors and others based on your firm's reputation in the local business community can create an expectation that your firm performs services for the benefit of third parties. This could create opportunities for third parties such as hanks to pursue claims against your firm.

Don't "puff" the firm's experience. Puffery can take two forms: exaggerating the depth of firm personnel experience in performing a service or promoting the expertise of senior personnel Who probably won't participate in the engagement. Both types help create unrealistic expectations.

* Presentation materials. Multimedia presentations and handouts used in live seminars often oversimplify complex matters to streamline a marketing message for potential clients. Review materials for presentations or handouts for accuracy. Moderators should use notes to prepare for live presentations, which sometimes are recorded.

* Slogans. Catch phrases can help establish a brand or company image, but professional services firms should be careful not to create a specific service expectation. One large firm used a slogan similar to, "There is no business we can't improve." Unfortunately, as a result of the lack of improvement in a client's business, this and other marketing materials became central to litigation by the client against the firm. If your firm uses a slogan, omit suggestions of outcomes such as "success" or "tax savings" and focus on what your firm can deliver, such as "timely work product" or "dedicated professionals."

Don't post misleading Web site content. Many firms' Web sites provide an extensive list of professional services linked to other parts of the site where blurbs promote the firm's experience, competence and stability in the marketplace. Even though a Web page listing professional CPA services may not specifically claim a particular practice specialty, the juxtaposition of information can create an expectation that the firm has special expertise in all the practice areas listed. Many firms design their Web sites to include reference tools to draw clients and prospective clients to the site multiple times. Sonic include financial calculators and "hot links" to Web sites of regulators and governmental resources. If the calculators use correct, up-to-date formulas, those materials don't present significant informational risks.

However, purchased Web site content is another story. Purchased content often incorporates regularly changing materials that the provider--not the firm--screens before posting. Some of the content may be incorrect or inapplicable to clients in your region. If it's important to you to give clients access to such materials, provide a link to other Web sites that contain them and design your site to display a pop-up message informing users they are leaving your site when they click on the link.

Assign staff to regularly review and revise or update materials and navigation links posted on a firm Web site. Web site designers are attuned to ease-of-use issues but may not know the order of access required for technical guidance for clients and prospects. Finally, a firm should post its privacy policy on its Web site.

Don't rubber-stamp inaccurate newsletters. Many CPAs purchase newsletters from third-party providers and distribute them to clients or post them on a Web site under the firm's name. Articles may suggest a specific course of action for clients that your firm may not endorse or they may recommend a service your firm isn't qualified to perform. Firms should read newsletter articles for relevance and correctness before distributing them. On a regular basis, review previously published articles or newsletters in Web archives and delete obsolete information. In tax practice even general advice can become obsolete in a few months based on changes in law, regulation or interpretations by taxing authorities.

THE LESSON

A designated CPA firm principal and firm attorneys should review for accuracy all marketing materials--including advertisements, firm brochures, information posted on a firm Web site, articles, newsletters, handouts and seminar presentation materials--before publication or distribution. If the materials discuss a specific practice specialty, the firm principal in charge of that service area should review them, too.

Marketing is an important part of CPA firm practice development and can encompass a wide range of activities. For more on organizing a protective strategy, see "Build a Marketing Pyramid," page 29. Oversight of the marketing process, much like the work performed by a firm quality-control director, can help CPAs both refine their message to clients and prospects and reduce the risk that promotional materials can be used against the firm in a malpractice claim.

An Ounce of Prevention ...

Forty-two states have consumer protection statutes that impose liability on professionals for false or misleading advertising.

While these laws vary, violations can result in civil or criminal enforcement actions.

Source: Steven Platau.

Build a Marketing Pyramid

To reduce risks, it may be helpful to build a firm "marketing pyramid," which encompasses setting up the engagement along with the following protective steps:

* Inventory your firm's competencies. Gather objective and quantifiable data on personnel training and experience by type of service and client industry, degrees and professional designations and membership in professional organizations, including any positions held in such organizations. Review these data to develop a list of services your firm is qualified to perform.

* Use that information in developing your advertising and marketing materials. If you decide to promote services your firm is not currently qualified to perform, your advertising and marketing materials should explain how your firm will access the resources to perform these services competently; for instance, by engaging an industry expert through a professional service alliance or association to which your firm belongs.

* Create templates foe written proposals. They should list separately each service your firm is offering to perform for a particular client. If your proposals discuss the firm's qualifications to perform services, address each service separately rather than include a blanket statement promoting the firm's qualifications and experience. Proposals should clearly state the client will be required to sign an engagement letter before services can begin.

* Obtain a signed engagement letter that clearly defines the scope of the engagement. Attach the proposal as an exhibit to the engagement letter and refer to the services listed in the proposal, identifying the specific services your firm has been engaged to perform. Because such letters are contractual agreements, it's important to use a standard format that clearly expresses the services to be performed, addresses the obligations of the client, relevant professional standards, engagement limitations and other significant matters.

PRACTICAL TIPS TO REMEMBER

Follow these advertising dos and don'ts to minimize liability.

Do

* Develop and implement a firm marketing pyramid (see page 29).

* Require partner-level and attorney review of materials before publication along with regularly scheduled follow-up.

* Review the AICPA Code of Professional Conduct, section 502, for guidance on advertising.

* Describe engagement deliverables.

* Use client testimonials to demonstrate the value of your firm's services.

* Describe the firm's industry specialization and practice area training and experience.

* Promote services your firm currently is qualified to perform.

* Enumerate employee professional credentials, training, experience and professional organization activities.

Don't

* Distribute marketing materials without review by designated firm principals and attorneys.

* Exaggerate firm qualifications.

* Create inflated expectations regarding level of service or standard of care.

* Imply your personnel will serve as members of client management.

* Promise an outcome (such as tax savings).

* Use unrealistic slogans.

* Describe yourself as an expert when the context is not an expert witness engagement.

* Suggest that third parties are intended users of your work.

* "Puff" experience.

* Allow Web site designers to direct firm site content and navigation.

Resources

AICPA Conference

Practitioners Symposium June 13-15, 2004 Venetian, Las Vegas 

AICPA Publications

* Risk Management: A CPA Toolkit for a Changing Environment by Anthony E. Davis, Marcia Gordon and Robert H. Spencer (# 056503JA).

* Management of an Accounting Practice Handbook, loose-leaf version (# 090407JA); e-MAP, electronic version (# MAP-XXJA).

For more information about AICPA resources, to place an order or to register, go to www.cpa2biz.com or call the Institute at 888-777-7077.

Another good resource is the CPA's Guide to Effective Engagement Letters, edited by Ron Klein, Ric Rosario and Suzanne M. Holl, Aspen Publishers.

STEVEN PLATAU, CPA, JD, is professor of accounting at the John H. Sykes College of Business, University of Tampa, Florida. He has been involved in CPA professional liability issues for more than 20 years. His e-mail address is [e-mail]. JOSEPH WOLFE is assistant vice-president of risk control for Continental Casualty Company, one of the CNA insurance companies that underwrite the AICPA Professional Liability Insurance Program. He has worked in the defense of CPAs for 15 years. His e-mail address is [e-mail].

Note: This article should not be construed as legal advice on any factual situation. The general information in this article is not a substitute for the advice of professional counsel. The opinions set forth in this article are solely those of the authors and do not reflect the position of CNA.