James Franco’s Accounting Firm Sued

As you have probably heard by now, actor James Franco has made the news – again.  This time, however, the news is how he was allegedly defrauded out of money by his former talent manager and aided by his accounting firm.  The lawsuit explains that the talent manager went to the talent agency and said that Franco would no longer pay 15% commission, only 10%.  The agency agreed and moved on.  The talent agent did not tell this to Franco, but instead took that 5% and diverted it to businesses and accounts he himself owned.  The lawsuit also claims that the accounting firm aided in this scheme by hiding the accounting.  The accounting firm of Tanner, Mainstain, Blatt, Glynn & Johnson have not made any direct comment to the press.  They have filed a counter-suit against the talent agency claiming they were mismanaged, though.

This case brings up two important risk management issues.  The first is the need for strong oversight of the relationship when working with high-profile clients.  The entertainment industry continues to be high-risk for lawsuits due to the high dollar amounts handled.  Rarely is there a “small” claim dealing with actors.  Having a second partner or a committee review the relationships is a prudent step for any firm.  Knowing when to disengage a client before a situation arises is often best done by an independent set of eyes.

The second risk management point to consider is proper oversight of the work product.  While it was the talent agency – not the accounting firm – whose partner made the misrepresentation about the commission change, many accounting firms are working on commissions and the same situation could happen.  Having two partners review the contract and work product of each engagement will reduce the risk of such fraud.

Contact us today to discuss further ways to protect your firm.

MF Global Holdings sues PWC for $10.9B

MF Global Holdings, the commodities brokerage run by former New Jersey governor Jon Corzine, has sued Pricewaterhousecoopers for “extraordinary and egregious professional malpractice”. The $10.9 billion suit follows the 2011 spectacular meltdown and bankruptcy.

PWC is accused of advising for the off-balance-sheet accounting treatment for the European sovereign debt investment that lead to the firms downfall.

The case is  MF Global Holdings Ltd as Plan Administrator v. PricewaterhouseCoopers LLP, U.S. District Court, Southern District of New York, No. 14-02197.

Contact InsureAccountants.com to discuss skyrocketing errors and omissions demands and how to protect your firm by structuring a layered insurance program.

PCAOB: Audits Need Attention

The Public Company Accounting Oversight Board (PCAOB) has released its findings on its compliance audit of Auditing Standard Number 7 (AS No. 7).  AS No. 7 is designed to assure that audit opinions are correct and the methodology used is sound.  This is accomplished through the mandate that an engagement quality review be completed on each audit of a public company.  Through its inspection, the PCAOB found that the execution of AS No. 7 was often lacking at firms.

While the PCAOB noted that, in general, firms had incorporated the requirements of the new standard into their checklists, methodologies and training; the incorporation of AS No. 7 did not always equate to the execution of AS No. 7.  It was noted that in many of the audits the PCAOB found to be deficient, the matters that led to the failure were included in the reviewer’s list of items to review – but this failed to lead to discovery of the error in the audit.  The reason for this is that the audit review team failed to fully execute on the principles of AS No. 7.  For more details and to read a copy of the report, click PCAOB AS No 7 Findings

More Than A Report

While the PCAOB’s goal is to enforce standards and regulations that keep the accounting industry at its best, this report serves as more than simply a warning to auditors of public companies to increase their audit reviews – it serves as a risk management litmus test for all firms.

Audit engagements serve as the riskiest type of work an accounting firm can perform.  This statement is a result of a review of accounting malpractice claims and professional liability insurance losses our firm has performed over the years.  Audit claims have the highest severity of any claim (while tax claims are typically the most frequent, they are resolved for a much lower amount that audit claims).  Performing a clean and excellent audit – and having a robust review of the findings by a third party in the firm – will do more than satisfy regulators.  Such an audit may also save the firm tens of thousands of dollars in future claims and lost time.

When an audit claim is in settlement negotiations or being litigated, the stronger the audit file, the better case the accounting firm has to defend against the lawsuit.  If the audit was not performed to the latest standards as set by the relevant regulating board, the stronger the plaintiff’s case becomes that the audit the plaintiff relied on to make a decision was deficient and therefore the cause of the loss of money.

The PCAOB found many audit reports that lacked the clarity and support of the audit findings.  They also found many accounting firms that failed to employ certain internal reviews that would have caught the errors.  While fixing this at a firm is simply at heart, it is time consuming and requires a change in processes and manuals.  However, as explained above, this simple fix may also help a firm avoid the headache of a lawsuit, and save both time and money dealing with it.  If you are interested in discussing additional ways to protect your accounting firm from lawsuits, contact an experienced broker today.


Update – Tax Preparer Requirements

Tax Preparer Requirements

There are currently no regulations on becoming a tax preparer or on the scope of work one must perform.  But for the last few months, the IRS has been trying to change that.

The ongoing saga of trying to change this has hit another step as a US Court of Appeals for the District of Columbia has formed a three judge panel and begun hear arguments on whether tax preparers should be regulated by the IRS.  The opening arguments have taken place, and while the decision remains months away, the case is important to tens of thousands of individuals.

The entire matter stems from the discussion of whether tax preparers represent tax payers, or simply perform a service.  Stemming from issues after the civil war, those who represent citizens before the IRS were given the title “enrolled agent” and have been required to show their competence and education.  This 1884 law authorized the IRS to regulate enrolled agents, but it has historically been understood and accepted that a tax preparer is simply performing services for a fee and nothing more.

The Obama administration explained before the judges that a tax preparer should come under this law, and therefore the IRS has the right to regulate.

The opposition – the Institute for Justice (a Libretarian advocacy law firm) – explains that congress has never given the authority to the IRS to regulate tax preparers and a tax preparer is simply performing a service.

Previous posts have revealed that the IRS is reaching to bring tax preparers under their purview and require them to pass a competency test and complete continuing education classes.

78 million people in the United States have paid someone to prepare their taxes.  Those performing this service range from full time CPA firms, boutique shops, large companies such as H&R Block, corner shops, franchises and even friends.   The implication of this law will potentially drive many people out of the business, and increase the fees preparers must then charge for their services.

Risk, Regardless

From a risk management perspective, a tax preparer – whether they technically “represent” a tax payer or not – is still performing a professional service for a fee.  This opens a preparer up to liability should filing deadlines be missed, an error made on the forms or incorrect information conveyed to the government resulting in penalties.

Whether tax preparers are held to the same professional standards as CPAs or enrolled agents is secondary to the point that preparers have the risk of a malpractice lawsuit the moment the engagement starts. It is important for all tax preparers to remain up to date on tax code changes and diligent with all client relationships.

Professional liability insurance – also known as malpractice insurance or errors and omissions insurance – can be purchased by tax preparers.  Many insurance companies offer these policies regardless of designations and do not require the applicant to be a CPA.  Premiums can be as low as $300 a year, and afford protection when needed most.  Contact a licensed broker today to discuss how to best protect your firm and tax practice from lawsuits.

Cyber Threats and Fee Suits

NATP Warns of Lack of Cyber Security Preparedness

The National Association of Tax Professionals polled the attendees at their annual conference in July.  One set of questions revolved around how prepared tax professionals were for a cyber attacks and or network security breach.  Their findings were alarming.

Only 38% of the 633 in attendance classified themselves as familiar with cyber threats, with 51% saying they are “somewhat familiar.”  As for preparation for such an event, only 15% of those at the conference said they purchase cyber insurance and only 33% have written a disaster recovery plan.

For tax preparers, CPA’s and accounting firms, the safeguarding of sensitive client information is paramount.  Accounting and tax professionals have access to hundreds – or thousands – of social security numbers, home addresses, income amounts, investment details or other information that a client would be upset if it was made public.  A cyber attack that results in the loss of  this type of client information is not covered by standard insurance.  While 65% of the survey respondents felt they had adequate insurance for this type of loss – only 15% said they buy cyber insurance.  There may be a number of firms who find themselves without adequate coverage in the event of an actual loss.

State and federal data loss laws are very specific and costly to comply with.  Contact us to discuss whether network security insurance is right for your firm.

Payments Slow to Come In

Sageworks, a financial information company, reports that from 2011 to 2012 professional service firms have been receiving payments from clients more slowly.  Consulting firms waited an average of ten days longer, while accounting firms and IT firms waited an additional  five days on average.  While private companies have always had strong cash flow incentives to delay payments, this trend is also being seen from public companies and large corporations.

The Wall Street Journal reported earlier this year that Proctor and Gamble would “add weeks to the amount of time it takes to pay suppliers.”  Other large retail and commercial companies were reported as doing the same.  delayed payments allows for an increase in float, which can fund expansions or stock buybacks.  However, the impact of slower payments can trickle downstream to smaller suppliers and vendors who are then forced to pay their accountants later than usual.

The danger accounting firms may have when faced with a delay in payments is collections issues.  Smaller accounting firms rely on quick payment to make their own payroll and bills.  Larger firms have an accounting department who simply looks at the days in arrears and not at an individual client’s situation.  Both instances can lead to suits for fees by an accounting firm who needs to be paid.  This can lead to poor client relations, or a counter claim to the fee suit that will cost the firm more than the fees originally sought.

It is important to realize that not all professional liability insurance will cover a counterclaim to a fee suit.  Many policies explicitly exclude coverage for any claims “based on or arising out of” fee suits.  If fee suits are a practice that your firm utilizes, it is important to discuss how your insurance will respond.  Contact us for a review of your current policy and to discuss options to have these types of lawsuits protected.


June Happenings – Supreme Court Ruling and Audit Work Scrutinized

Supreme Court Issues Key Ruling on Definition of “Supervisor”

In a key case for employment practices this month, the Supreme Court issued a ruling that changed the definition of “supervisor” for the purpose of determining liability for workplace hostility.  The case originated when a female employee of Ball State University’s dining services department experienced hostility, discrimination and harassment from a catering specialist who worked there as well.  The woman filed a lawsuit against the university alleging that it created an environment that was hostile.  The University defended itself by explaining that the catering specialist was neither a manger nor a supervisor of the plaintiff, so they had no strict or vicarious liability in the hostilities between two coworkers.

In June, the Supreme Court ruled that the catering specialist was not a “supervisor” and therefore the University was not liable for her actions.  The Court continued explaining that “an employee is a ‘supervisor’ for purposes of vicarious liability under Title VII if he or she is empowered by the employer to take tangible employment actions against the victim.”  This definition departs from the standard definition the EEOC uses which is allows for the term “supervisor” to be used much more broadly.

This decision by the court is far from a panacea from employment liability, however.  An organization that hears of harassment in the workplace and fails to act can still be held liable.  Also, the Court explained that when an organization concentrates the decision making power into a small group, an individual in that group may not have direct management responsibility over an employee, but still be help liable for actions by the group.

It is important for firms to continue to drive a company culture that discourages any form of discrimination or harassment.  A firm should have a hotline to report such activities and each report should be investigated thoroughly.  Employment related lawsuits continue to be an expensive but very preventable situation.  Contact ProtectLawyers.com to discuss ways to protect your firm.

Accounting Firm Sued for Basketball Coach’s Errors

EisnerAmper, LLP has been served with a lawsuit in conjunction with litigation against a Greensboro, Arkansas basketball coach and financial planner.  Stan Kowalewski coached high school basketball and also ran SJK Investment Management – an investment fund that at its height had $70M in assets under management.  Mr. Kowalewski used his influence as a coach and his past record as an investor to secure institutional clients and investors.  SJK also used their audits as evidence that their work was above-board.  After discovering the mismanagement of funds, the SEC investigated SJK.  EisnerAmper is being attached to the suit for failure to uncover gross mishandling of money during their audits.  The prosecution even points to the fact that a Google search of Stan Kowalewski would have revealed a case of using booster funds from sporting events for his personal purposes – which should have raised red flags and led to further scrutiny of the investment firm.

Audits and work on  financial institutions continue to be the most severe accounting professional liability claims in the industry.  It is important to use checklists and second partner reviews of all engagements to prevent oversight – or alleged oversight – from bringing a claim against the firm.


IT Risks, Lawsuits and AICPA Standards

“Managing IT Risks and Compliance” Tops Tech Initiatives

A survey of 1,670 American Institute of CPA (AICPA) members nationwide revealed where firms see their information technology needs in the next year.  The AICPA asked members what their firm’s top IT initiatives would be for the upcoming year and compiled the top ten responses.  “Managing and retaining data”, “Securing the IT environment” and “Managing IT risk and compliance” where the top three most cited initiatives.  The full list can be viewed here.

This highlights the need for firms to carefully consider how they transfer the risk of lost client data, hackers and system down-time that can lead to large expenses and lost productivity, explains InsureAccountants.com.  Cyber insurance is quickly becoming a necessary policy for firms to purchase.  It is important to understand whether a firm has exposure to first party loss, third party loss or both.  Some policies contain some “cyber” coverage already, but a careful review of the policy wording may reveal gaps in coverage that need to be filled.

Professional Golfer Sues Accountant

A federal judge has ruled that Hank Kuehne, a professional golfer, can sue his accountant in Florida for allegedly not disclosing that he owed back taxes and penalties to the IRS. Kuehne discovered he owed over $500,000 after another accountant took over. It was also discovered that the accountant, Thomas Bertsch of FSM Capital Management, attempted to settle the debt for $90,000 and did not respond to a counteroffer by the IRS for $342,000.

The ruling is available here.

AICPA Proposes New Standards for CPA Financial Planners

The AICPA Personal Financial Planning Executive Committee has released a revised set of standards for CPAs acting as financial planners.  The committee has revised these standards to reflect the ever-increasing trust the public is placing in their accountants for broad range of financial related advice and services.  The standards contain wording on working with third party service providers, responsibilities of the CPA when dealing with the client, the duties owed to clients, and what financial planning services should entail.

The standards have been in place since 1992 and were most recently updated in 2010.  During the 2010 revision, only a few states adopted them as the standards to be used.  The AICPA and committee has opened the proposal up for public comments until September 9th.

In terms of risk management and professional liability claims, these standards are very important to take note of, explains InsureAccountants.com.  In the event of a lawsuit, the judge, mediator or jury will look to these guidelines (among others) to establish whether a firm or an individual acted in a manner considered to be standard and proper in the industry.  If the firm acted outside of these established rules, the firm’s actions become harder to defend and justify.  Alternatively, explaining how a firm acted becomes easier when the firm can point to well-established business models and industry experts as the source of their methodologies.


Lawsuits can pose a risk to any accounting firm and it is important to have an insurance provider and an insurance broker that work with you as a team.  To discuss your firm’s insurance programs or further risk management techniques, contact InsureAccountants.com today.

April Update

Insurer Successfully Denies Large Claim

Admiral Insurance Company has successfully denied a large claim from Silverman Neu LLP after a federal judge ruled in their favor.

Silverman was jointly and severally liability for a portion of a $259M 2009 verdict that included $137.5M against BDO Seidman LLP and $25.9M against Kostin Ruffkess & Co. LLP.  Silverman was hit with $42.8M.

The underlying class action center on the accounting firms assisting   Cambridge Credit Counseling and Cambridge/Brighton Budget Planning  violate the Credit Repair Organizations Act.

Silverman had purchased a $4M policy from Admiral that contained an absolute exclusion for wrongful acts. The case highlights the need to negotiate the finer points of policy coverage and to present claims in a way that makes it difficult for insurers to deny.

KPMG Resigns from Herbalife and Sketchers Due to Insider Trading

Earlier in April,  KPMG resigned from two large clients over misuse of those client’s data.  The partner in charge of the audits for those two public companies was found to have used non-public information to make stock trades.  Because the data was collected as part of the firm’s audit engagement, the firm has fired the auditor and disengaged itself from these two clients.  A firm of 22,000, KPMG is disavowing the actions of this partner as rare and wrong.

Every accounting firm owes the duty of loyalty and care to all its clients.  A firm should take careful note to not only maintain rules and regulations to keep client information secure, but to actively check to see that such protocols are being followed and modeled by all members of a firm.  KPMG paid a large price by dropping two large and well-known clients.  It is a price no firm would want to pay and each firm should protect against.

Anti-Fraud Case Study Released

The Anti-Fraud Collaboration – a partnership of  the National Association of Corporate Directors, the Center for Audit Quality, Financial Executives International and the Institute of Internal Auditors – has released a case study on how fraud might be perpetrated and detected at a company.  The study is meant to serve as a discussion guide to help firms think through just where fraud can arise at a company and to make auditors more alert during their due diligence.  The study and accompanying study guide can be found here.

In order to best protect your firm, carefully crafted insurance terms should be combined with great risk management.  Contact InsureAccountants.com to discuss how these topics might apply to your firm.

Tax Preparer Injunction Denied

In an update to a previous post, a federal court of appeals has denied the motion to stay a lower courts decision to deny the IRS the power to impose education on tax preparers.  This means that the IRS has no power to enforce its rules on tax preparer education as the matter is finalized by legislation and courts.

Considered a victory for tax preparers who find the CE requirements cumbersome and costly, this is by no means a green light for tax preparers not to stay abreast of all rules and regulations applicable to their work, explains InsureAccountants.com.  Contact us to discuss ways to protect your tax practice.









Property Developer Misstep Leads to Lawsuit Against Accounting Firm

A Florida property developer has been sued for allegedly funneling over $3M for his personal use.  Zack Davidson was contracted to build a large community in Marin Metropolitan District and was given money by the district to help with the project.  The lawsuit explains that those monies were misdirected and names the law firm, accounting firm and listing broker as parties that allowed the fraud to be perpetrated.

While this suit is still in its early stage, the complexity of the case promises to make it an expensive and drawn out trial.  InsureAccountants.com explains that court costs can easily climb into the six figures and a proper insurance program will provide defense costs in such a scenario.  Contact us to discuss whether your firm is adequately protected for the risks your firm may encounter.