Certified Public Accountants often serve as trusted advisors long before a client ever speaks with a lawyer. Because of that role, CPAs are frequently the first professionals to see warning signs that a business dispute may be escalating toward litigation. Recognizing those signals early can help protect the client’s financial position and reduce downstream risk. Understanding what to watch for allows CPAs to provide better guidance and, when appropriate, encourage timely legal involvement.
Why CPAs Are Often the First to See Litigation Risk
Litigation risk rarely appears overnight. It develops through financial strain, deteriorating relationships, and operational breakdowns that show up in accounting records well before a complaint is filed. CPAs see unpaid invoices, irregular transactions, capital calls, and unexplained expenses. They hear frustration during review meetings. They notice when financial controls loosen or when management behavior changes.
Because CPAs already have deep visibility into a company’s financial health, they are uniquely positioned to identify patterns that suggest a legal dispute may be forming. Early awareness can help clients avoid costly missteps that often occur once litigation becomes adversarial.
Cash Flow Disruptions and Unusual Payment Behavior
One of the most common early indicators of litigation risk is abnormal cash flow activity. Late payments from key customers, sudden fund withholding, or disputed invoices may signal brewing conflicts. Vendors may change terms, demand accelerated payment, or refuse to deliver without concessions.
When clients begin setting aside reserves for “potential issues” without clear documentation, that ambiguity deserves attention. These disruptions often coincide with contract disputes, threatened lawsuits, or internal disagreements that can quickly escalate if left unaddressed.
Ownership and Partnership Tension Reflected in the Numbers
Business divorces frequently leave financial fingerprints. CPAs may observe irregular distributions, inconsistent capital contributions, or disagreements over expense allocation. When owners stop agreeing on budgets, compensation, or reinvestment strategy, the financial statements often reflect that discord.
Requests for historical records, valuation analyses, or sudden changes in access to financial data can indicate that one party is preparing for a dispute. These situations often become bet-the-company cases if ownership control or business continuity is at stake.
Aggressive Accounting Positions and Pressure to Reclassify
Clients facing litigation risk may push for aggressive accounting treatments to improve optics or preserve leverage. Requests to reclassify expenses, accelerate revenue recognition, or minimize reserves can be red flags. While not every aggressive position signals litigation, pressure to deviate from sound accounting judgment should prompt caution.
In contentious environments, financial statements often become exhibits. CPAs play a critical role in maintaining credibility by ensuring accuracy and consistency, even when clients feel pressure to present results in the most favorable light.
Rapid Growth in Professional Fees and Advisory Costs
A noticeable increase in consulting, forensic accounting, or advisory expenses may signal behind-the-scenes conflict. Clients may already be engaging experts quietly and legal expense accruals that appear without explanation also warrant discussion.
These cost increases may indicate that a dispute has progressed beyond informal negotiation. At this stage, early coordination between accounting and legal advisors is essential to avoid duplicating effort and to formulate a consistent strategy.
Document Requests and Preservation Concerns
When clients begin asking about document retention, historical transaction support, or email preservation, litigation risk is often imminent. CPAs should be attentive to sudden interest in old records, especially when tied to specific transactions or time periods.
Improper handling of documents can create additional exposure once litigation begins. CPAs can help clients understand the importance of preservation and encourage careful coordination with legal counsel before taking action that could later be scrutinized.
The Importance of Early Legal Alignment
One of the most valuable contributions a CPA can make is recognizing when financial issues have crossed into legal risk territory. Encouraging early consultation with experienced litigation counsel can help clients evaluate exposure, protect financial evidence, and explore resolution options before positions harden.
At Richardson, we have extensive experience working with CPA referral partners to resolve client issues. When litigation risk is identified early, clients retain more control over outcomes, costs, and strategy.
Helping Clients Stay Ahead of Litigation Risk
CPAs do not need to practice law to play a critical role in litigation risk management. By paying close attention to financial signals, asking thoughtful questions, and encouraging proactive planning, CPAs help clients navigate uncertainty with greater confidence.
For CPAs, vigilance strengthens client relationships and reinforces their role as trusted advisors during some of the most consequential moments a business may face. From a risk management perspective, early help with informed decision-making and addressing issues ensures financial reporting, tax strategy, and litigation posture remain consistent throughout the dispute lifecycle.