Accounting is an inherently risk-prone profession, with firms facing a range of potential hazards that could threaten their clients, their finances, and their reputation. The AICPA’s 2022 PCPS CPA Firm Top Issues underscores this point, revealing that managing risks is one of the top concerns for CPA and accounting firms over the next 5 years.
In today’s fast-paced business environment, accounting firms must stay vigilant and must practise effective risk management to keep pace with evolving threats. From data breaches to regulatory violations, the consequences of a mismanaged risk can be significant, including loss of business, legal liabilities, and reputational damage.
In this article, we’ll explore the various types of risks that CPA and accounting firms face today and provide risk mitigation strategies along with guidance and best practices.
Range of Accounting Risks
CPAs and accounting firms face a range of risks, and – to make it easy to remember – I have coined it as C-CORP:
- Cybersecurity risks
- Compliance risks
- Operational risks
- Reputation risks
- Professional liability risks
If you’ve worked in this field for any length of time, you’ve probably faced most of these risks. If any of them are new to you, please share in the comments and we’ll provide more information.
Regardless of the size of your firm, these risks do not differ except that smaller CPA firms may have fewer resources to manage those risks.
To minimize the potential risks and threats that your business may encounter, it is important to implement a set of risk management strategies and work with proven practices. These practices include conducting regular risk assessments, developing clear plans, procedures, and policies, implementing them, training your staff, communicating with stakeholders, and continuously reviewing and improving them. Time to look at them one by one!
Risk management strategies and practices
Lets me share the details of these practices:
Assessment:
Identify applicable laws and regulations: The firm should identify all applicable laws and regulations that govern its profession, including federal, state, and local regulations. These regulations may include tax laws, labor laws, financial reporting requirements, and data privacy regulations.
Conduct a risk assessment: A risk assessment should be conducted to identify the firm’s risks and vulnerabilities. This assessment should include an evaluation of the firm’s hardware, software, data, and network infrastructure. The results of the assessment should be used to develop risk mitigation plans.
Conduct compliance assessments: The firm should conduct compliance assessments to evaluate its adherence to applicable laws and regulations. These assessments may include audits of financial records, reviews of tax returns, and assessments of data privacy controls.
Identify operational risks: The firm should identify all potential operational risks that could impact its operations, including risks associated with technology, processes, and human error. This may involve conducting a risk assessment of the firm’s operations. A must-do if your goal is to create an ace risk mitigation plan!
Evaluate the likelihood and impact of each risk: The firm should evaluate the likelihood and potential impact of each risk identified in the risk assessment. This will help the firm prioritize its risk management efforts.
Develop plans:
Develop a risk management plan: A risk management plan outlines the firm’s approach to identifying, assessing, and mitigating risk. The plan should be comprehensive and include specific procedures for each type of risk the firm faces, including professional liability risks.
Develop controls and procedures: The firm should develop controls and procedures to mitigate each operational risk. This may include implementing internal controls, establishing standard operating procedures, and using technology to automate and streamline processes.
Quality control procedures are designed to ensure that the firm’s work meets professional standards and that errors are minimized. Procedures may include engagement letter templates, checklists for common engagements, and documentation requirements.
Develop a comprehensive compliance program: The firm should develop a comprehensive compliance program that outlines the firm’s policies, procedures, and controls for managing compliance risks. The program should include regular compliance training for staff and the designation of a compliance officer responsible for managing the program.
Read on for more risk management strategies or take the time to check my article on managing regulatory compliance
Develop a cybersecurity plan: A cybersecurity plan should be developed that outlines the firm’s approach to identifying, assessing, and mitigating cybersecurity risks. The plan should be comprehensive and include specific procedures for each type of risk the firm faces, including data breaches, phishing attacks, and malware.
Getting overwhelmed by technology? Read adapting to emerging technologies
Develop a crisis management plan: Even the most prepared firms can experience unexpected crises that can damage their reputation. Developing a crisis management plan that outlines how the firm will respond to various scenarios can help mitigate the impact of these crises. The plan should include procedures for communicating with clients and stakeholders, as well as strategies for rebuilding the firm’s reputation over time. Your risk mitigation plan will be incomplete without this.
Accounting Seat from Finsmart has done wonders for hundreds of accounting firms in the USA. Check out what this accounting firm has to say about us:
Implement & Establish:
Review and obtain appropriate insurance coverage:
The firm should review its insurance coverage to ensure that it has adequate coverage for any operational risks that cannot be fully mitigated.
Insurance coverage should include:
- Professional liability insurance: Designed to protect the firm against claims arising from errors or omissions in its work.
- Cybersecurity insurance: Designed to protect the firm against losses resulting from a cyber incident.
Smaller firms should work with an insurance broker to identify appropriate coverage levels and insurance policies to protect against potential liabilities. Remember, risk management without the right insurance is risky.
Implement peer review: Peer review involves having an independent CPA review the firm’s work and provide feedback. Peer review can help identify potential professional liability risks and provide insights on how to improve the firm’s operations.
Implement whistleblower policies: The firm should implement whistleblower policies to encourage employees to report any potential compliance violations. These policies should include procedures for reporting violations anonymously and should protect employees from retaliation.
Establish a business continuity plan: The firm should establish a business continuity plan to ensure that it can continue its operations in the event of a disruption. This plan should include steps to identify and mitigate operational risks, as well as procedures for responding to incidents and restoring normal operations.
Establish a strong ethical culture: A strong ethical culture is the foundation of any successful business, and it can help prevent negative behaviours that can damage a firm’s reputation. Firms should develop and communicate clear ethical standards, and encourage all employees to follow them. The leading accounting firms consider it a crucial strategy for risk management.
Establish a system for monitoring and reporting potential risks: The firm should establish a system for monitoring and reporting potential risks. This system should allow staff to report concerns or potential risks in a timely manner, so they can be addressed before they turn into actual liabilities.
The firm should also implement a system for monitoring and analyzing cybersecurity threats. This system should allow the firm to detect and respond to potential threats in a timely manner.
Establish security policies, procedures, and controls: Security policies and procedures should be established to govern the firm’s use of hardware, software, and data. This is critical for risk mitigation and management.
The firm should implement appropriate controls to manage compliance risks. This may include controls for monitoring employee conduct, policies for data retention and disposal, and procedures for verifying the accuracy of financial reports.The firm should also implement a backup and recovery plan to ensure that data can be restored in the event of a breach.
Security controls may include firewalls, antivirus software, intrusion detection systems, and encryption. Security policies should address issues such as password management, access control, and incident response.
Communicate & Train:
Invest in employee training: Providing employees with regular training and professional development can help prevent reputation risks by ensuring that all employees are up-to-date on industry standards, best practices, regulatory changes, and new accounting standards.
All staff should be trained on cybersecurity best practices, including how to recognize and respond to phishing emails, how to create strong passwords, and how to secure their devices. In today’s tech-driven world of accounting, this is crucial for creating a comprehensive risk management strategy.
Training can also help employees recognize and avoid behaviours that could damage the firm’s reputation. Training can ensure that staff members understand their roles and responsibilities in managing operational risks. This may involve providing training on new procedures or technology, as well as conducting regular meetings to discuss operational risk management.
Training should be ongoing and updated regularly.
Communicate effectively with clients: Effective communication with clients is critical to building and maintaining a positive reputation. Firms should ensure that clients are regularly updated on their projects and that their expectations are properly managed. When issues arise, firms should address them quickly and transparently.
Review:
Stay up to date on regulatory changes: The firm should stay up to date on any changes to laws and regulations that affect their profession. This may include attending relevant seminars or conferences, subscribing to industry publications, or working with legal counsel.
Continuously monitor and review: The firm should continuously monitor and review its operational risk management efforts to identify any weaknesses or areas for improvement. This may involve conducting regular internal audits or external assessments of the firm’s operational risk management.
Maintain accurate records: Accurate and detailed records are critical in managing professional liability risks. The firm should document all client communications, maintain accurate workpapers, and keep records of all decisions made during engagements, all financial transactions, and data in compliance with applicable laws and regulations. This risk mitigation practice includes keeping detailed records of employee hours, expenses, and financial transactions.
Monitor and respond to online reviews: Online reviews can have a significant impact on a firm’s reputation. Firms should monitor online reviews and respond to any negative feedback in a timely and professional manner. By engaging with clients online, firms can show that they care about their clients’ experiences and are committed to resolving any issues.
Above are the risk management strategies and mitigation practices that are used by CPAs and accounting firms across the globe. We hope that this detailed article will help you upgrade your risk management models!
Connect for Accounting Offshoring Support
By partnering with an experienced offshore accounting services provider Finsmart Accounting, CPA firms can access a team of professionals who are knowledgeable about the latest technologies, up to date with ever-evolving accounting norms, and also domain experts in US accounting.
In addition, offshoring can also help to streamline operations, reduce costs, improve the overall quality of services provided to clients, and manage risks.
Share your thoughts
Would you like to know more about managing risk effectively to grow your accounting practice? Start the conversation below or check out our recent blogs on offshore accounting:
Ensuring data confidentiality & security
Tips to engage the best bookkeeping outsourcing company in India
2023 strategies to expand accounting business
India entry services to expand and scale in India
LEGAL DISCLAIMER
Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has a different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language
