When Competency Becomes an Ethics Issue … or More

When Competency Becomes an Ethics Issue … or More

The current shortage of qualified staff has led accounting firms into an ethical challenge with the potential for significant damage to the profession, according to a national expert on risk management for CPA firms.

The difficulties firms have had in finding and retaining qualified staff during the past several years has led to a problem of inadequate competency, says John F. Raspante, CPA, an adviser with CAMICO Mutual Insurance Company.

He notes that the problem has been compounded by the reduction of the Big Five to the Big Four and the cascading of extra work to mid-sized firms and then to smaller firms. The resulting surplus of work and the dearth of experienced CPAs have created a business environment in which too many firms are accepting engagements for which they are not qualified.

“Firms seeing the current environment as an opportunity to obtain new clients and increase their billings will do better by considering the increased risk exposures from accepting engagements that are not a good fit for the firm’s expertise,” Raspante says. “Substantial losses in revenue and billable time, as well as damage to reputations, can come from disappointing clients and becoming embroiled in litigation. Further, violations of professional and ethical standards as a result of incompetent work can potentially put a firm’s licenses in jeopardy.”

Raspante points to CAMICO claims experience, which shows that CPAs are most at risk when expanding into new service niches without adequate preparation. Statistics show that once a firm has entered a niche, it needs to practice in it often enough to stay current and proficient in it.

The chart below, “Loss Ratios vs. Service Concentration” shows that services that represent 65 percent or more of a firm’s service concentration produce loss ratios of about 25 percent (i.e., 25 cents of every premium dollar is a loss). Services that represent 15 to 65 percent of a firm’s service concentration produce loss ratios of about 70 percent.

But the kicker is in services representing less than 15 percent of a firm’s service concentration: Loss ratios rise to a staggering 225 percent. Clearly, dabbling in an area where the firm is not practicing the services often enough is a highly risky activity.

Codes of Conduct

The issue of competence is addressed in the AICPA Code of Conduct under ET Section 56, Article V: Due Care, as well as in several state codes of conduct. Article V, Section .03 of the AICPA code states that competence “establishes the limitations of a member’s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member’s firm.”

Raspante recommends these basic options to dabbling:

Refer clients to other practitioners who have the requisite expertise in a specific area; and/or
Consult with other practitioners to acquire the expertise needed in a specific area.

“Referring clients to other practitioners instead of attempting to perform a service for which you are unqualified is not only the prudent course of action, but it will generate goodwill and respect from clients who will appreciate the referrals,” he said. “Clients are already accustomed to accepting referrals from their doctors and other professionals, and CPAs will enhance their own reputations by emulating such practices.”

Gaining Competency

Raspante suggests that CPAs interested in gaining competency in a specific area do so by:

acquiring CPE in the area;
reading the professional literature;
acquiring a designation in a specialization;
consulting with a practitioner who is current in a specialization;
joining a CPA society committee on a specialized area (e.g., estate planning committees);
joining a specialized association or society (e.g., business valuation associations); and
joining an association of other CPA firms to facilitate consultations, cross-referrals and the exchange of expertise and information as part of the learning process.

“Competency includes the ability to identify risk stress points in an engagement, which requires a thorough understanding of the client’s business and industry. Take your time and err on the side of caution when venturing into new territory,” says Raspante.

Practitioners can utilize the AICPA Competency Self-Assessment Tool (CAT) to evaluate their strength in certain areas. The tool is free to AICPA members and $49 per year for non-members. (See www.cpa2biz.com.)

Audit and accounting literature is also available at www.cpa2biz.com for several specialized areas in industries such as agriculture, airlines, securities broker-dealers, lending institutions, casinos, construction contractors, insurance companies and state and local governments.

AICPA audit quality centers also provide guidance and information for specialized audits. Links are posted at www.aicpa.org under Professional Resources/Public Accounting Firm Resources: Center for Audit Quality, Employee Benefit Plan Audit Quality Center and Governmental Audit Quality Center.

Client Screening

“CAMICO has long recommended client screening as a way to evaluate not just whether a current or potential client is acceptable, but whether the firm is qualified and able to provide the services the client needs,” Raspante said. Client screening processes have become standard practice for such purposes, as evidenced by AICPA Practice Alert 2003-03 on “Acceptance and Continuance of Clients and Engagements.”

“Some CPA firms make an annual habit of redefining and understanding the scope of their practice, going as far as to write out a clear statement of what they can do and what they cannot do,” he said. “If they have clients who don’t fit into that scope, they disengage and refer the clients elsewhere. Establish a policy for what types of engagements your firm will avoid because of a lack of technical expertise.”

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