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

* 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.