Transcript: Ric Rosario, CPA

MAUREEN DINGUS:  
Welcome to Leading Forward, the Virginia Society of CPAs podcast where we focus on innovation, leadership and the CPA profession. I'm your host, Maureen Dingus, and I invite thought leaders for short, casual conversations on topics and trends important to the success of the CPA profession. On this episode, we're talking with Ric Rosario, President and CEO of CAMICO, the professional liability company that likes to say was made for CPAs by CPAs. So thank you, Rick, for joining us. We really appreciate your time. Just to kick it off, what's going on in CPA land? What are you hearing from some of your firms? What are are the hot topics? 

RIC ROSARIO  
Well, right now, one of the things that I've learned is the relationship between claims against CPAs and economic times. And so, if you think about that for a moment, we've kind of experienced as a country one of the most prolonged positive economic boom. And what that's meant is a really calm period for claims against CPAs all across the country, which is really good news. Now, as I like to say, when clients are making money, they're more worried about making money than suing somebody.

MAUREEN DINGUS:  
Yeah, they're happy. So no big deal.

RIC ROSARIO  
People don't usually sue when they're happy making money.

So what we've seen a lot is a very calm litigation environment against CPAs. Normally what we see currently or less horrifying was tax claims generally, are the prevailing frequency of claims. They tend to be where, you know you get an accountant who does make mistakes once in a while applying tax law or perfecting it, you know, again, a client contributes a lot of times by misapplied or making a decision prior to talking to the CPA, and then you get into a dispute about the client alleging that the CPA should have known. So again, these are things that are fairly routine in what we see. in our claims book, we probably accumulated...CAMICO's been around since 1986, so 30 plus years, and we've accumulated probably 20,000 claims in defending CPA. So lots of experience over time. And, again, normally tax is our primary area of claims. And then when we have bad times you see other areas sprouting so. So the good news is the climate environment against CPAs are pretty quiet. Right?

MAUREEN DINGUS:  
Right. Right. So that's the good news. But there is the looming discussion out there of when is the recession going to happen? And how will that turn the tables for our CPAs out there? What do they need to start thinking about if anything?

RIC ROSARIO  
Right. So, I don't want to predict, but you know economic cycles, there will be a recession again. The question is really how big or small will it be. So if I look back at CAMICO, we have had three batches of bad economic, bad claims against the CPAs. So for those that have been rattling open, probably longer than you were in society, like a little older than you. CAMICO's first spike of claims was somewhere in 9192. When there were some for those who are around, a lot of real estate and limited partnerships were formed. A lot of people ended up losing money in those deals. So we had quite a few claims, in spite of called spike claims was somewhere in 91-92 timeframe. It calmed down afterwards. So then the 90s were pretty good. And there was a good run through the late 90s. Again, economic times you call me down. Things were picking up from a from a business economy perspective. And then of course, we had the the total fake out of Y2K, right in the world thought it was going to fall for the CPA something machines going to shut down. And but that didn't really cause any problem. What did cause it was 2001 2002, which was the economic slowdown for the.com bust, that caused another spike of claims against CPAs because of a fair amount people losing money. And I'll come back to the typical claims that we see in in a recession. And then again, things calm down post one of 2001 2002. And that, of course, comes 2007, 2008, the mother of all recessions, or you know, the Great Recession. And probably CAMICO's worst year in our three decade was that 2009 year in that, when I say worse year, it's because of  a massive spike in claims against CPAs. And since then since I would say 2010 2011 it's reverted back to that period of time where I just talked that we can spiritually good economic times.

So what we see in these times when people loose money are three areas: First: generally investment loss. So either people invest in companies or stocks or something, maybe a project or invested in a real estate deal, and all of a sudden the recession, the value collapses. Somebody loses money, and when somebody loses money, sometimes it has to be somebody else's fault. This professionals understanding either the lawyers, the accountants, the architects, often are forced to be blind. Second, is business failure companies go under. So in the case of investment loss, you usually got a third party, in case of business value, or it could be a third party shareholder or could be management itself, who claim that somehow the CPA should have told them that they were going to fail. On the financial statements should have recognized that the company was going to fail. It's providing the test services or even tax services. So that'd be the second area. Third area and probably the most severe of claims against CPAs. is the lack of detection of fraud. Okay. Not fraud by CPA, although we do have some CPA is that bad apples, but it's pretty rare. It's very rare. But you know, once you twice even we see a CPA doing something that's unethical or illegal, and that's a separate conversation.

But CPAs  get sued for not detecting either fraud or embezzlement at the client level. And we can probably have a lot of conversation, the CPA to say, why am I responsible? Even if I just did a compilation or review, but the outside public, the jury, the jury of your peers, of course, which there's not a lot of CPAs on jury on the CPA loss. They will tie in the concept of the trusted financial advisor. I rely on you Mr. CPA or Mrs CPA. I built this business all by myself, and I hire professionals, right help me manage my business. And that's a double edged sword because a lot of times we do do that as CPAs for our clients, and it's a high value service, the client pays for that. However, oftentimes the fraud creation is really because of something in the management that aloud it or a really sophisticated fraudster that's figured out how to kind of pull the wool over the manager's eyes, or shareholder. So in all these situations, they tend to show up in bad economic times, and that is business value, investment loss and discovery of fraud. Well, I often like to say in the good times, is when the fraud gets put together. So Right now, as you and I talked, and I told you to start with this about how good everything is right? Right now, the clients throughout the country, there's frauds being put together.  because everybody's making money. Everything looks good, everybody's happy and no one is paying attention. So they take the eye off the ball. Management takes their eye off the ball paint, the controls that are normally in place suddenly are not so important. The tension of management to certain basic business practices are not so important. And then the fraud gets put together and money gets drained out. And when the recession hits all these things that are covering up the fraud...It's like when you go to the beach, and you're looking out at the ocean, and you're standing on the sand and you say, how lovely is that? It's beautiful. Except for when the tide goes out. And then you see when the tide goes out all the junk and trash and cans are just below the surface. But what was under it was a lot of accumulated bad actions, right? Oh, it's somewhat. It was my kind of fun analogy to kind of say, right below the surface is things that we can see over the course of life. You see it? It's really a good description of recession times. There's good times across.

MAUREEN DINGUS:  
So I'm wondering, Ric, what do CPAs do? In the meantime, before that recession hits? So they have their clients maybe looking a little more closely and don't get that backlash. 

RIC ROSARIO  
It's really a good point, it takes work. First of all, the CPA who really cares about the clients and has an intimate kind of knowledge and insight into a client. There are certain characteristics that are more mobile. So if a CPA is lucky they could have hundreds of clients. They need to think about, okay, you know, which clients do I have  that are pretty sophisticated, maybe they have really good strong controls, maybe have an audit done, so those things alone are reinforcements that there's still good business practices going on. But once you have a client that falls below that, maybe they don't have an audit or review, but maybe just have a compilation. But we provide full services as a CPA, maybe we do the tax returns, we do the compilations, or maybe even prep statements. The client relies on us a lot for making business decisions. They have built their own business or not so sophisticated. Those clients are more vulnerable to the things that I just talked about. So some of it is I know it's not a great word profiling, but

MAUREEN DINGUS:  
Hey, like almost like a little stress test.

RIC ROSARIO  
Kind of segregating your client base, to say, of the clients that might be more vulnerable, who who might be. There are not a lot of people checking other than maybe the the manager themselves. So the second would be the key functions in the accounting area. How are they centralized? Is there any segregation of some of the things that are going on? So, is there a couple of people in the accounting department?

So there's a couple people checking, is the owner, more active and kind of keeping an eye on things or is the owner absent? Because the owner is busy playing golf or going in and letting subordinates kind of run the shop. These things I described, create an environment where, let's call it it's vulnerable for somebody to take advantage, particularly for one of the most prevalent plays against CPAs is a dozen or defecation recall. Simply an employee steals money. And they have, you know, all the way from the simplest, changing the address the payee on a check and endorsing it and put it in a bank account, the writing checks to visa, instead of paying the company credit card, they put it into their own credit card. Just as simple as wire transfers or slowly bleeding money out of the company and announced it's not really visible. So these happen. We have dozens and dozens of those every year. They're worse usually, we find out the bigger ones in these bad times. So looking for clients that are more avoidable either because of their management infrastructure for by their employees. Classic and turn control Is segregation of duties right? Or if you can segregate them, the better chance you have of allowing someone to do something inappropriate.

MAUREEN DINGUS:  
Yeah, so really the vulnerability is maybe the key factor in protecting yourself is being able to identify that.

RIC ROSARIO  
Right and sometimes I know CPAs are viewed as the naysayers or the downers right?

MAUREEN DINGUS:  
The bad guys.

RIC ROSARIO  
But guess what, when something goes wrong, we're the first to point to. So why didn't you say something? So, I mean I, I'm sympathetic to that going on but it is our role. See as CPAs we have it embedded in our DNA that we're Supposed to be professional skepticism. That is a key word in our profession that I was trained and most of us are listening to. And it doesn't mean you have to be, you know, Debbie Downer or Don Dengar. But the point is, that's the responsibility that's important for the client here. And I like to say it's our responsibility to alert the client, advise the client, they can disregard your advice. That's okay. Now, the only problem is, oftentimes, two or three or four years later, if there's a problem, and you did advise, record it. But guess what the clients recollection is after three or four years--they never told me. So that leads me into when we do have these consultations with clients....And again, it's it's in the interest of trying to help the client and give them awareness of issues. We need to document this. So documentation of critical advice or important advice is instrumental in what I call a proper good loss prevention program for a CPA for that doesn't mean you have to write a book. That just means a simple note that goes into the clients file that says, You know, I spoke to john or Barbary CEO, or president or owner and just said, you know, you really should be thinking about not signing checks in advance and giving them to all employees. When you go off to the golf golf course. Don't leave, you see things like the checks be left out. All right. You have an obligation to at least let them know it's not good.

MAUREEN DINGUS:  
Right. Right. So those contemporaneous notes that are you know, I think sometimes people with those things they wanted to say the perfect thing and write this, you know, eloquent thing, but it's really just you need to write it down when it happens.

RIC ROSARIO  
Yeah, just a simple note, if you're writing today, that's it, put it in the file, and a piece of yellow paper or, or some kind of firm standardized, you know, the iPhones have a standardized notepad that works out great. So, you know, clients, maybe have the clients name with a number. But I will tell you, in a in a litigation situation, documentation wins out all the time. There is lawyers that are representing the client that have no problem in manufacturing conversations that or pretending like they don't happen. Documentation wins all the time. And when you talk about the jury setting, and they're looking at the client, the note listen to the clients lawyer there looking at the CPA and see their lawyer, they're trying to figure out who's telling the truth and the expectation by the jury, they have no expectation that a client would write anything down. But they would have an expectation that you are the professional in the room, that if you did say something, you would have written it down. And if you did, they tend to believe you all the time. But the absence of no note, that is kind of your word against the clients was and the challenge is, so people are really good liars. And, and, and accountants are not. And so the general and sometimes even accountants are not even there. That's what it is because it's not an environment, the uncomfortable record. So I would tell you time and time again, documentation either in the working papers, or the documentation that surrounds the word boring or important, have saved the bacon, time give the CPAs.

Where CPAs tend to fall down is the documentation of the things outside the normal engage. So when I say tax returns, trigger or conquer, honored, whatever the working papers are, are strong, but it's the conversations with the client. Conversation with third parties of the engagement letters you know. CAMICO has been for you know, since we started the foundation of documenting communication is the engagement letter and in itself what helps to make it clear what accountants are supposed to be doing, what the client's responsibility are, what happens if certain things occur like the client stops payment, you know, then CPAs can stop work. There's a number of things. So then the course documentation should be separate. CPAs often don't think about just as important as it is to document the started relationship. It's just as critical to document the separation. We get lawsuits where the client as called a CPA says I'm firing. And then the CPA hangs up and goes, thank God, I've been at this client all by you. And now I'm done with them because the CPA couldn't figure out how to find.

So, CPA goes on and what happens is sometimes, five minutes later  the CPA gets a call from the lawyer saying, we're going to sue you because my client missed the following deadlines, you know, for some tax return. And of course the CPA says, but what do you mean, the client fired me? Lawyer says, Well, yeah, they did. But you were responsible to make sure all the returns are done until they found a new account. You didn't do that? And of course, that's all ridiculous. But let's just start with the issue. So we've seen that a number of times where the client comes back because of missed deadline, and because of missed deadlines, there's penalties and interest and it was really because his client was a deadbeat but yet still expected the CPA to animal now the call

MAUREEN DINGUS:  
You broke up but you weren't really broken up wasn't really done.

RIC ROSARIO  
Yeah, right, right. So, again, this goes back to documentation. All the CPA can do is write a note saying client called on this day.

I said, okay, returning all your materials and, you know, we will no longer be responsible for hitting your deadlines. Or by the way, are you aware that you have some deadlines coming? Are you going to take care of them or do you want us? Those simple questions and the answer is documented, would make this go away in a minute. And unfortunately, as much as I talked about, chemical talks about it, we still see that documentation fall down.

MAUREEN DINGUS:  
Well, it's really going back to the basics. It's not this new idea, this emerging issue, it's like, yeah, this is what we need to be doing and how we needed to be doing it. But it's those reminders that have to keep happening. So I guess the moral of the story is, you can get pulled in when you least expect it, even if you're doing all those right things. Well, Ric, you've given us lots of great tips. And before we sign off here, do you have any predictions for the new year. Any anything we should keep our eyes on?

RIC ROSARIO  
One of the things I always tell my audience is, I do a lot of talking to CPAs, is when you worry about the risk as a CPA. Just remember this morn risk comes decline than actually the work you do. So, your work as a CPA is not the issue. The risk that comes to you is from the client that you'll find. And so, again, focus on, who are you associated with? Your reputation, your integrity, your work. Keep that in mind. I think that'll help guide people in their world that is bloated with risk,

MAUREEN DINGUS:  
Right? Yeah, yeah. Good. Good Alan for the year and beyond. Alright, so everyone, thanks for listening to leading forward. Make sure that you subscribe to our podcast and we will catch up with you soon.