Video Summary:

In this transcript from a video by Andy Gale from Gale & Vallance, we dive into the important topic of insurance gaps for CPAs doing legal work. Andy explains why CPAs should not draft legal documents, highlighting the risks of stepping outside their professional scope and the serious consequences it may bring for both the CPA and their clients. This video comes from Gale & Vallance in Orange County and provides insights into protecting yourself and your practice.

To learn more about how insurance gaps for CPAs doing legal work can create serious risks, check out our detailed article on liability and compliance issues for accountants.

Please note: this video does not constitute legal advice, and we strongly recommend contacting a qualified attorney regarding your specific case.

00:00:07 – Opening Statement

I think you absolutely have to be nuts if you’re a CPA, and you’re in the practice of helping your clients form business entities such as corporations and limited liability companies.

00:00:21 – A Client’s Story

Why?
Here’s why.
I had a very interesting meeting with a client earlier this week.
He’d found me on the internet and said, “Hey it looks like you’ve got a lot of expertise in forming small business entities such as corporations and limited liability companies.

He wanted my insight into a particular problem that he had.
He had formed a small business corporation and had been sued as the result of one of his business dealings.
And the plaintiff, that is the person bringing lawsuit, was trying to pierce his corporate veil.

They were trying to pierce the corporate veil on the grounds that he didn’t properly form his corporation, and he didn’t have all of the documentation necessary to show that he had completed all of the corporate formalities.

I said, “Oh that’s no problem. Generally, you just go back to the lawyer that helped you form the corporation.
They may be able to walk you through some of the discrepancies and describe to you, from a legal standpoint, why they did what they did.”

He said, “That’s where the hang-up is.
I didn’t have a lawyer do it.
It was my CPA that helped me do it.”

And I said, “Your CPA was the one that actually drafted all the legal documents?”
He said, “Yeah, if they pierce the corporate veil, I want to sue my CPA, because he’s the one that led me to believe he knew exactly what he was doing.

It looks like I’m probably going to lose a lawsuit, and it may be North of 500,000 dollars.
I just want to make sure that if I go down, I want my CPA to go down with me, since he’s the one that did the paperwork that has now put me in the position of potentially losing all my personal assets.”

00:02:05 – Why This is a Horrible Position for CPAs

So why is this such a horrible position for the CPA to be in? There are three big reasons.

00:02:11 – Reason 1: Practicing Law Without a License

One.
When you as a CPA start drafting legal documents, you’re actually practicing law.
And in the state of California, you need a license to practice law.
If you don’t, you can actually be prosecuted for committing a crime here in the state of California.

It puts you in a horrible position vis–à–vis your client.
If he’s suing you for allegedly doing work that you’re not licensed to do.
Then you’ve got no ability to defend yourself by saying, “Actually, I do have a license. And I was making professional judgments in terms of how I was going about drafting the paperwork.”

So that’s the first nasty point you have to face.

00:02:49 – Reason 2: No Insurance Coverage

The second nasty point that—a lot of CPAs who do this sort of thing don’t think about—is that you’re not insured if you mess the paperwork up.

Now let’s take a lawyer.
Lawyers have a specific kind of insurance.
It’s errors in omissions insurance, or malpractice insurance that says, “Hey, look if you the lawyer are drafting legal documentation and you make a mistake, we’re going to insure you.”

So for example, we carry multiples of millions of dollars of insurance just to protect us in the event that we make a mistake.
And mistakes are human errors, and they do happen.

However, if you call up your insurance carrier as a CPA.
And you ask your carrier, “Hey, by the way, if I draft legal documents and I make a mistake, will you cover me?”
The answer is going to be no we don’t, because you’re not licensed to practice law and therefore our insurance coverage does not extend to any mistakes that you might make as their lawyer, or acting in the capacity of their lawyer.

00:03:46 – Reason 3: Legal Fees Without Coverage

The last big problem for the CPA doing this kind of work is that if you get sued and you have to defend yourself, since there’s no insurance available, you’re going to have to pay the legal fees yourself.

And even if you were able to just get knocked out of the case at some point down the road, you could end up spending 15, 25, 35 thousand dollars just hanging in the lawsuit long enough to be able to get yourself out of it, and for the 500 or 1000 dollars that you might make helping a client incorporate their business.

The potential downside of just having to defend a lawsuit like this would be an absolute nightmare.

00:04:27 – The Ongoing Challenge

Alright.
So we’ve now gone through a few reasons why it’s not a great idea for you the CPA to be doing legal work on behalf of your client, but we still have the challenge.

We want to help our clients do the best they can in the tax world.
And sometimes that’s by use of a business entity in which they can run their business.
Sometimes we like to use a corporation, sometimes an S Corporation or a C Corporation.
Sometimes we like the Limited Liability Company format for the same good tax reasons.

How do we get our client into that entity, and yet not lose the client if we send them over to a business lawyer that we don’t know or might not have a good relationship with.

Worse yet, if we just send the client out and tell them use Legal Zoom or find yourself a business lawyer and come back to me.
All of those pose a risk for you and your ongoing relationship with the client.

00:05:24 – The Solution: Partnering with a Law Firm

The solution is to do business with a law firm like us.
We completely and totally respect the CPA/client relationship.

If you as a CPA refer a client over to our office.
We’ll only ever send that client back to you.
If there’s any tax questions that come up in the course of our relationship.
Again, all those questions go back to you.

Our view is that we the lawyers and you the CPAs is that we are partners in helping the client do the best they can in the real world.
The best they can from a legal standpoint and from a tax and accounting point.

00:05:59 – Experience & Partnership

I’ve been in this business for 30 years.
I’ve seen hundreds and hundreds of corporate tax returns.
But do you want to know how many corporate tax returns we’ve done in our office?
Zero.

The reason is that the world of accounting is part science and part art.
It’s very, very complicated.
You need that 10,000 hours of experience so that you can do the best work that you can for your clients.

It’s impossible, I think, for you guys to master that work and then on top of that be expected to master all of the intricacies of doing legal work as well.

That’s the reason why we think a partnership between a CPA and a law firm is so important and so critical for all of our clients.

So if you find yourself in a situation where you recognize that it’s in the best interest of your client to form a business entity, we would very much welcome the opportunity to work with your firm and respect that client/CPA relationship that you’ve got.

And in the meantime be sort of a back office support, if you will, for the client, and perhaps a power partner with you the CPA firm.

00:07:06 – Closing

If you have any questions, please give us a call.
My name is Andy Gale, and we practice law here in Orange County California.

Conclusion

Why CPAs Should Not Draft Legal Documents

As Andy Gale explains, drafting legal documents exposes CPAs to liability and insurance gaps that their professional coverage does not protect. By understanding these risks, CPAs can stay focused on accounting services while collaborating with attorneys for legal work, ensuring clients receive proper protection. If you are a CPA, take the time to safeguard your practice and avoid unnecessary legal pitfalls.