Oh BOI: The Corporate Transparency Act and CPA firms

By J. Michael Reese, J.D., LL.M, and Sarah Beckett Ference, CPA
Originally published in the Journal of Accountancy

Enacted as part of the 2021 National Defense Authorization Act and amending the Bank Secrecy Act, the Corporate Transparency Act (CTA) is intended to close a perceived information gap related to money laundering and other illicit acts.

The CTA requires reporting companies to self-report information to the Treasury Department’s Financial Crimes Enforcement Network (Fin-CEN) about their beneficial owners and company applicants. Determining whether a company is considered a “reporting company” and whether an individual is considered a “beneficial owner” or a “company applicant” under the CTA is complex, and failure to comply with the CTA can result in civil or criminal penalties (or both). For instance, the failure to comply with the statutorily-mandated reporting timeframes regarding the filing of initial or updated reports could result in a $500-per-day penalty (up to $10,000) and up to two years of imprisonment. Additionally, any person who, without authorization, knowingly discloses or uses beneficial ownership information (BOI) can be fined $500 per day (up to $250,000) and imprisoned for up to five years.

Though some questions regarding the CTA’s compliance requirements and timing remain unanswered, it is generally accepted that the CTA will at minimum have an immediate, short-term impact on many small and midsize businesses as well as sole practitioners — the bread-and-butter client base for most CPA firms.

Given the nature of the CPA-client relationship, a client’s first inclination may be to turn to their CPA for advice on the CTA rather than their attorney. CPAs who decide not to provide CTA-related services could still face professional liability risk for a client’s noncompliance in certain situations. Because of the significance of the penalties associated with noncompliance, such claims may be severe.

ADDRESSING ALLEGATIONS OF A FAILURE TO ADVISE

If a client suffers a loss that can be traced to CTA noncompliance, they may allege that the CPA failed to advise them. To help reduce the likelihood of this claim assertion, consider sending a newsletter or other general client notification letter to all clients informing them of the CTA and its reporting requirements. Retain a copy of the newsletter as well as the distribution list.

In addition, unless specifically engaged to provide CTA assistance, for the avoidance of doubt, include a provision in all engagement letters, regardless of service, disclaiming a responsibility to do so. Including this provision helps defend against a client’s “you didn’t tell me” assertion and makes it clear to the client that they should not expect advice on this topic from the CPA. A sample provision follows:

 Corporate Transparency Act/Beneficial Ownership Reporting

Assisting you with your compliance with the Corporate Transparency Act (“CTA”), including beneficial ownership information (“BOI”) reporting, is not within the scope of this engagement. You have sole responsibility for your compliance with the CTA, including its BOI reporting requirements and the collection of relevant ownership information. We shall have no liability resulting from your failure to comply with the CTA. Information regarding the BOI reporting requirements can be found at fincen.gov/boi. Consider consulting with legal counsel if you have questions regarding the applicability of the CTA’s reporting requirements and issues surrounding the collection of relevant ownership information.

ADDRESSING THE RISK OF PROVIDING OFF-THE-CUFF ADVICE

Even if not formally engaged to provide services related to the CTA, you may find yourself in the middle of a dispute if you provide informal advice in response to a client’s “quick question” about the CTA and the client’s filing obligations. Answering one-off questions related to the CTA, if relied upon by a client, may not only result in bad or incomplete advice, but may also cross the line into the unauthorized practice of law, as discussed in the next section.

Providing ad-hoc advice is typically fraught with risk. Although directing the client to an attorney for advice may be the right answer, it may not always be the most popular. If compelled to provide a high-level response of a general nature in response to a client question, be sure to follow up the advice with written documentation to the client advising them of the limitations of your advice and direct the client to retain a qualified professional for a more detailed response. For more, read “Do I Really Need a New Engagement Letter for That?” (JofA, Professional Liability Spotlight, December 2022).

RISK CONSIDERATIONS RELATED TO THE PROVISION OF CTA SERVICES

Professional liability risk associated with assisting a client with CTA reporting obligations depends on many factors, including: (1) the development of regulatory guidance and case law related to the CTA; (2) details of a specific client’s situation, organization, and ownership; and (3) the nature and extent of assistance rendered.

Any CTA service, however formulated, carries its own risk profile. CTA compliance assistance carries with it some unique risks not typically associated with CPA firm services :

CTA and the unauthorized practice of law (UPL)

Providing technical or interpretive advice on the CTA may rise to the practice of law. The “practice of law” is defined by the states, and many have an express prohibition against UPL.

Accountants have a limited grant to “interpret” tax law under Title 26 of the U.S. Code (the Internal Revenue Code) via Treasury Circular No. 230 and state accountancy statutes. It is unclear whether interpretation of CTA statutes, which are under Title 31 of the U.S. Code (Money and Finance) is similarly permissible. Depending on a client’s fact pattern, CTA compliance may require affected entities to obtain legal advice and analysis.

Insurance considerations

Coverage for any claim asserted arising from CTA services will be evaluated based on the claim’s underlying facts, the insured’s policy language, and applicable state law at the time the claim is reported. In general, an accountant’s professional liability policy covers errors and omissions arising from the delivery of professional services. Professional services is typically defined in policy language and generally includes services performed in the practice of public accountancy.

The CTA is new, and how the CTA fits within the existing interpretation of the practice of public accountancy is unclear. In addition, accountants’ professional liability policies typically exclude coverage for actual or alleged criminal acts. Depending on the state, a UPL violation may be treated as a criminal matter.

Other risks

Other unique risks that may arise if the CPA provides CTA assistance to clients include added bank scrutiny as bank underwriters may ask CPAs to confirm a client’s CTA compliance in the form of a “comfort letter” or other documentation; heightened data security risk as CTA compliance may require gathering data that is not ordinarily requested or retained by the CPA; and the increased risk of an aiding and abetting claim if the CPA is accused of assisting a client who is found to have intentionally filed false reports.

Risk management considerations related to CTA services

If a CPA decides to provide assistance to clients related to their CTA compliance, understanding the risks presented by the service is a key step in understanding how to manage them. Careful planning and consistent application of risk management techniques including, but not limited to, a separate engagement letter that narrowly defines the scope of services may help mitigate risk. Consultation with your legal counsel and professional liability insurance carrier is strongly recommended to help you understand your risks.

The approximate number of businesses the Financial Crimes Enforcement Network (FinCEN) estimates will need to comply with the Corporate Transparency Act in the act’s first year.

Source: FinCEN final rule, published Sept. 30, 2022.

J. Michael Reese is a risk control consulting director and Sarah Beckett Ference is a risk control director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.

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