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CPAs Dabbling Is Russian Roulette with 5 Bullets - Part 1


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach, Carl Lloyd Sheeler, PhD, ASA, CBA, CVA at (516) 938-5007


The AICPA has some straightforward opinions on CPAs who “dabble” in niche practice areas. In short, it brings ethical issues and subsequent penalties to bear. So, why do more than a few CPAs dabble in financial services, revenue sharing of insurance product, advise on equity transactions without FINRA/SEC approved licensing and, my favorite, business valuation? For the money. Why is it an ethical issue for the AICPA? Competency.
Article V, Section .03 of the AICPA code of conduct (due care) 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.” The basic alternatives to dabbling are to: (a) refer clients to other practitioners who have the requisite expertise in a specific area; and/or (b) consult with other practitioners to acquire the expertise.

So, about consequences. Most CPA practices’ E&O coverage will not cover dabbling related claims. I’ll illustrate. Is it sufficient to abide by SSVS-1 AICPA’s and/or industry valuation standards, if the accountant is performing 2 to 4 engagements annually? In litigation, the Frye Standard required more knowledge than the layperson to constitute “expertise”. This was replaced by the court case Daubert, which required the testifying professional to have sufficient and unimpeachable experience. Then there is the IRS “qualified appraiser” standard. Such a person has earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised…. AND must have at least 2 years of experience in the trade or business of buying, selling, or valuing the type of property being valued.

In all but 10 cases of 160, I have been involved in IRS dispute or litigated matters where the opposing side had a CPA who was the valuation expert, this side lost. They lost for several principal reasons: (1) Did the firm receive billings for other services rendered to the client? (Goes to the impression of conflict – see Daubert above). (2) How many formal written valuation reports has the “expert” written in the Subject industry and in total? (Full-time BV professionals can and do 25 or more reports per annum) What data sources were utilized and excluded? (Goes to the tens of thousands of dollars a full-time valuation firm will expend on comparative, transactional and industry data, which seldom is invested in by the CPA dabbler, so excludes testimony in all the areas that data was available, but misapplied or not applied).

So, doesn’t it make sense to have a referral relationship that might produce tens of thousands of dollars in new business while maintaining peace of mind and keeping ethics intact? Or you can hope the penalties for being caught in an audit or disputed matter don’t create a self-inflicted wound by rationalizing away the risk for the nominal economic benefit.

ABOUT THE AUTHOR: Lance Wallach, Carl Lloyd Sheeler, PhD, ASA, CBA, CVA
Dr. Sheeler, National Managing Partner, Business Valuations, Ltd. has 20+ years of full-time BV expertise and is an industry thought-leader having trained thousands of valuation practitioners in complex matters involving discounting of equity interests and valuing larger midmarket companies.

Lance Wallach, National Society of Accountants Speaker of the Year and Member of the AICPA faculty of teaching professionals, is a frequent Speaker on retirement plans, abusive tax shelters, financial, international tax and estate planning.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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