Write It Down: The Importance Of Documenting Oral Advice
07 November 2013
Posted by: Author: Joseph Wolfe & Sarah Beckett Ference
Author: Joseph Wolfe & Sarah Beckett Ference (CNA)
CPAs routinely provide oral advice to clients. While professional standards generally do not require such advice to be documented, the experience of the AICPA Professional Liability Insurance Program demonstrates that undocumented advice weakens the defense to a professional liability claim.
This real-life scenario provides an example: A CPA providing bank account reconciliation services for a law firm learned of the client’s weak controls over accounts payable—a situation that could result in vendor fraud or payments to fictitious vendors. During lunch, the CPA shared his observations and provided related recommendations to one of the law firm partners, but he provided no written follow-up. The client later discovered that the CFO had conspired with vendor employees and embezzled more than $100,000. The client sued the CPA, alleging failure to identify and disclose the control weaknesses to firm management. The CPA provided deposition testimony regarding the lunch conversation, which the partner disputed.
Here’s another example of the problems
caused by a lack of documentation: A CPA prepared business and personal income
tax returns for the owner of an S corporation. The client asked the CPA about
the tax implications of dissolving the corporation. The CPA told the client
that the distribution of the S corporation’s real property might result in a
tax liability, but she did not document her discussion with the client. Later
that year, the client dissolved the S corporation and had to borrow money to
pay the taxes. The client sued the CPA, asserting that he would not have
proceeded with the transaction had he been properly advised.
These situations underscore the
importance of documenting oral advice. Clients may, in hindsight, claim
reliance on advice they allege was rendered erroneously—or they may even claim
the advice wasn’t given at all. Documenting oral advice provides written
evidence of the content and context of the discussions that were held. It also
can help mitigate client disputes and strengthen the defense of a professional
Accountants often give oral advice in
response to client questions, whether they are general inquiries or related to
specific business decisions. Requests related to specific facts and circumstances
should generate written correspondence to the client. For general questions,
notes to the working paper file may suffice. For example, a client may ask a
general tax-related question such as which states levy individual income taxes.
In this case, a note to the working paper file including the date, parties
involved, and a description of the topics discussed should be adequate.
When oral advice becomes
client-specific, it is best to record the discussion in a written
correspondence with the client. For example, a client may ask for advice about
entity formation, generating a discussion about S corporations, C corporations,
partnerships, and limited liability companies. The choice of entity could
significantly impact the accounting, taxation, and legal responsibilities of
the company and its owners. While the practitioner’s advice to the client can
be given orally, written correspondence via email or letter should follow. The
following key items should be included:
- Date of the discussion and names of
- Facts as provided to and known by the
- Advice provided, including recommended
client actions and applicable qualifications;
- Relevant accounting and tax
considerations, including technical accounting and tax guidance;
- Appropriate disclaimers, including that
the recommendations are based on the limited information provided and current
information and technical guidance, which are subject to change;
- Notice that no legal advice is being
- Items for client follow-up, including
any additional information requested, and the need for the client to consult
with legal counsel before making a decision.
CPAs typically have some knowledge of a
client’s business operations and may provide unsolicited advice related to work
flow improvements, internal controls, or recordkeeping enhancements. For
general advice that has minimal impact on client operations or risk,
documenting the discussion in firm working papers may suffice.
In other contexts, the CPA may provide specific
observations and recommendations for client follow-up. For example, upon
observing that a single person processes and pays vendor invoices, the CPA may
recommend that the client segregate duties related to the review, approval, and
payment of vendor invoices. Recommendations for specific actions by client
management should be documented in a written communication to the client and
retained in firm working papers. Documentation of such unsolicited advice can
prove instrumental in defending against allegations that a CPA failed to
properly advise his or her client.
SPECIAL CONSIDERATIONS FOR CONSULTING
The AICPA Statement on Standards for Consulting
Services does not address how the results of a consulting engagement should be
communicated to the client. Consulting engagements include extensive
discussions between the client, CPA, and, occasionally, third parties. Services
are generally performed for the use and benefit of the client, who is
responsible for both making decisions and implementing plans based on the
advice provided. Whenever practicable, a consultant’s findings, conclusions,
and recommendations should be provided only to the client. This helps prohibit
a third party from claiming reliance on that information.
Consulting engagement working papers
should contain documentation of discussions held, the date, and the parties
involved. Specific oral advice should be confirmed in a written report.
SPECIAL CONSIDERATIONS FOR TAX
Documenting oral advice provided to tax
clients requires consideration of the AICPA Statements on Standards for Tax
Services (SSTSs) and Treasury Circular 230, Regulations Governing
Practice Before the Internal Revenue Service (31 C.F.R. Part 10). SSTS
No. 1, Tax Return Positions, and its related interpretations, and
SSTS No. 7, Form and Content of Advice to Taxpayers, should be
consulted with respect to both advising clients on tax return positions and
rendering tax planning services. These standards and interpretations can assist
practitioners in communicating with clients and determining how to best
document oral advice. While SSTS No. 6, Knowledge of Error: Return
Preparation and Administrative Proceedings, indicates that advice and
recommendations to clients regarding corrective measures to be taken may be
given orally, a CPA should consider documenting this in a written communication
to the client.
Several current Circular 230 sections
apply to providing oral advice to taxpayers, including Sections 10.21, 10.33,
10.34, 10.35, and 10.37. Practitioners should monitor the proposed changes to
Circular 230, specifically revisions to Section 10.37, which would modify the
requirements for all written advice. Although Circular 230 does not establish
rules on how to document oral advice to taxpayers, the guidance contained
therein should be considered when deciding if and how oral tax advice should be
documented. Tax advice concerning filing obligations and applicable deadlines,
penalties, and interest charges that have or may accrue due to noncompliance
should be documented in writing to the client, along with the potential impact
if no action is taken.
is important that SAIT members familiarise themselves with the SA Tax Standards. The Institute developed and issued tax standards for
the South African tax environment based on international best practice. The SA
Tax Standards issued ensure members' compliance with the diligence requirement
imposed on registered tax practitioners as envisaged in the Tax Administration
Act, 2011 (as amended). Failure to adhere to these standards, may result in
disciplinary action being taken against a member in terms of section 241(1)(d)
of the Tax Administration Act.
are the foundation of a profession. The SAIT aids its members in fulfilling
their ethical responsibilities by instituting and maintaining standards against
which their professional performance can be measured. Compliance with
professional standards of tax practice also reaffirms the public’s awareness of
the professionalism that is associated SAIT members.