Navigating Uncharted Waters

By Phillip Howell, CPA, JD and Stanley Sterna, JD

Reprinted with permission of the Florida Institute of CPAs from the September/October 2010 issue of Florida CPA Today.

The British Petroleum (BP) oil spill in the Gulf of Mexico this year has had, and will continue to have, a devastating impact on our coastal environment, possibly for years to come. Businesses and individuals who rely upon the pristine nature of the Gulf coastal areas for their livelihood have been devastated as well. They have suffered loss of revenue; damage to real and personal property; and diminution in the value of their businesses and real property. Along with these financial considerations, they have suffered a serious blow to their way of life. Many have been forced to relocate to look for other opportunities.

Those affected already are making claims for these losses to BP and insurers. Lawsuits have been filed against BP and others involved with the Deepwater Horizon oil well, and a multitude of other lawsuits assuredly will be filed during the next several years. As has been widely reported, a new process is replacing the initial BP Claims Process. On June 16, 2010, BP agreed to provide, over time, a $20 billion fund for those affected by the oil spill (“BP Oil Spill Fund”), and President Obama appointed “Claims Czar” Ken Feinberg to set up and administer the claims process for the fund. Claims to the Gulf Coast Claims Facility began Aug. 23. To submit or resubmit claims, call (800) 916-4893 or visit www.gulfcoastclaimsfacility.com. These potential sources of recovery will require the assistance of experienced accountants who can provide related attestation services, business valuations, consulting services, tax planning advice and expert testimony.

The damage to Gulf Coast businesses will have a negative impact on CPA firms’ regular sources of revenue. This is not entirely new to most Gulf Coast firms that have been in business more than a few years. All remember the impact that the hurricanes of the last decade had on Gulf Coast firms. As Gulf Coast businesses suffered significant income reductions for extended periods of time – many closing their doors for good – CPAs experienced sharp reductions in traditional income sources such as bookkeeping, tax and consulting services, audits and reviews. In an effort to replace the lost revenue from this work, many CPAs ventured into other areas in which they were less experienced, such as attest services related to insurance claims, business valuations and litigation support. Being less experienced, some of these practitioners failed to consider critical issues when accepting these engagements. This sometimes resulted in liability and professional discipline.

This same dynamic is at work again, and CPAs can benefit from lessons learned in the aftermath of previous disasters. This article and the article on page 7 focus on several significant considerations in these claim-related engagements. The articles also discuss using properly drafted engagement letters and other techniques to mitigate these risks. This will help practitioners avoid misunderstandings with clients, thereby avoiding litigation or professional discipline.

Comply with Professional Standards
When determining whether to accept a consulting or attest engagement, the wary practitioner first should consider two of the profession’s general standards. Rule 201 of the AICPA Code of Professional Conduct applies to all services performed by members and is instructional for all others. These standards mandate that a member undertake only those professional services that the member or the member’s firm reasonably can expect to be completed with professional competence, and that the member exercise due professional care. Meeting these standards requires experience, or at least competence, in providing the services to be offered in the engagement. A CPA may conclude that he or she can obtain the requisite knowledge to perform the engagement competently. However, lack of experience in providing these services necessarily opens the CPA to direct attack in litigation brought by the client for professional negligence, or in litigation between the client and BP or an insurer.

If the business is large enough, there likely will be a need to present projections on future lost income or business valuation services. A CPA should have the necessary industry expertise to validate representations the client made, or be able to consult with an industry expert. Internet research or an industry publication may not provide adequate industry-related information. Because only a handful of CPA firms make their living helping clients submit claims for business interruption or diminution in value, it may be difficult for a CPA inexperienced in these services, or with a particular industry, to demonstrate that he or she complied with the first two general standards. Failure to comply with these standards is a breach of the standard of care sufficient to support a claim for professional negligence. Therefore, if the CPA lacks experience, association with an experienced CPA or industry expert is warranted, or the engagement should be declined.

Conclusion
When considering a BP oil spill claim engagement: 1) accept only those engagements in which you have sufficient competence and experience to complete the engagement with due professional care, and decline the other engagements; and 2) use a properly crafted engagement letter to minimize risk, avoid misunderstandings with clients and ensure timely payment (see the related story on page 7). These common-sense rules can help CPAs avoid disasters that may be lurking in the next engagement. 

Stanley Sterna, JD is a director of claims for Continental Casualty Company’s Accountants Professional Liability Program, which is endorsed by the AICPA. Continental is the nation’s largest provider of errors and omissions coverage for CPAs and accountants. He was admitted to the practice of law in the federal and Illinois state courts in 1990 and is a frequent speaker at seminars involving accountants’ professional liability claims.

Phillip Howell, CPA, JD is an attorney and director in the Tampa and Pensacola offices of Galloway, Johnson, Tompkins, Burr & Smith, PLC. He practices in the area of commercial litigation with an emphasis on professional negligence defense, first-party insurance, business and real-estate disputes and construction defects in federal and state courts. He also handles appellate matters.