For most accountants, it's a question of which professional liability insurance to buy, not whether. "even though I've never been sued, I consider e&o [errors and omissions, also known as professional liability] insurance premiums a small price to pay in order to be able to sleep at night," said Salim Omar, a Cliffwood, N.J., CPA.
"It's like homeowners insurance or car insurance," Omar said. "We hope we never have to use it, yet we have to have it."
In the wake of the financial crisis, the profile of claims against accountants remains steady. Traditionally, claims related to tax work are the most frequent, while audit claims are generally the most severe. The same holds true today, according to industry experts. "Once the initial wave hit, we would have expected the claims count to have gone down," said Joe Wolfe, assistant vice president of risk control at CNA. ""But that's not the case. We still see higher elevated levels of claim activity than we would have expected."
"We think that part of the reason has to do with staffing," said Jeff Day, vice president of specialty underwriting at CNA. "Staff reductions have resulted in firms doing more work with less staff, and that has resulted in increasing malpractice claims."
"We have seen revenue for firms stay flat, but the average staff count has been going down," he said. "Right around 2010 was the time we were hearing a lot of noise about managing expenses and reducing staff count. We hoped that staffing would return to a more normal level but that hasn't happened. You can't jump to conclusions on this, but there may be a connection that head count per revenue is less, and everyone is doing more work with less staff."
DRIVING THE TRENDS
"It all stems from the economic environment putting constraints on financial resources," Wolfe said. "Competition is fierce. That's why we've seen so much merger activity. There's been a lack of due diligence on the part of some of the firms being acquired and there has been inadequate post-merger integration activity. We've learned over time that the first year after a merger is the most critical. That's where we see serious claims come out over the years. It's important that firms manage their post-merger integration. A lot of times what this involves is high-risk clients in books being acquired, but they weren't identified at the outset."
Tom Henell, chief operating officer at North American Professional Liability Insurance Agency, agreed: "One of the trends we're seeing is a slowdown of mergers with firms. ... The regionals were gobbling up the smaller ones, but we're seeing that that didn't always work out the way it was anticipated. Now we're seeing de-mergers, putting firms back into their original pieces. The series of transactions creates some significant coverage issues, depending on how the insurance was handled at the time of the acquisition."
Henell believes it may be too soon to attribute trends in claims to the economic crisis. "Claims from the financial downfall are still coming into the cycle," he said. "We're just starting to see some of the claims from the downturn." Aside from the slowdown in mergers, Henell sees a "hardening" in underwriting procedures. "Carriers are being more conservative in their underwriting approach," he said. "They're being much faster to non-renew firms with any claims activity and they are more reluctant to write or provide coverage with any adverse areas of practice."
Day agreed: "From the market standpoint, there is a lot more underwriting discipline today, as there should be, than in years past," he said.
THE CLAIMS KEEP COMING
More claims are coming in, particularly in regard to tax work, according to Ron Parisi, executive vice president of risk management at Camico. "We see a more litigious environment, especially in the tax arena this year," he said. "Camico provides incentives to policyholders for early reporting of liability issues," he noted. "The reason we do this is because we've found that the early reporting of liability issues allows us more and better options for resolving disputes."
Bill Thompson, a CPA and president of CPA Mutual RRG, has noted an uptick in claims filed. "In 2011 we had a low point, looking at the number of claims without taking into account the severity. There was one claim filed for every 32 professionals. That eased to one claim per 39 professionals for 2012. And so far, this year the number of claims are about where we were at this point last year."
"As far as the economic downturn, we're still early in the cycle," he said. "The tail on these claims may take three to four years before they ripen. Audit failures are still our biggest claims in terms of severity, and we're seeing a lot more claims for defalcation and failure to detect fraud."
One of the issues that seems to go in cycles is liability attached to "comfort letters." These are often requested of CPAs to provide verification of a client's financial information to facilitate a loan or other transactions. "Just when you think they will go away, they come back, and liability attaches because the CPA is like a guarantor and provides some additional level of certainty regarding the client's ability to pay back the loan," said John Rasponte, director of risk management for NAPLIA. "It's not a new issue, but it seems to go away and then come back. We see it more often during a poor economy. If a loan runs into problems, the bank will go back to the file and see a letter from a CPA regarding financial solvency."
There's also greater scrutiny and audits by state taxing authorities, according to Rasponte: "More states are doing sales and income tax audits, so we're seeing more claims resulting from changes in income and sales tax exams. It's not a new item, but there's more emphasis because of taxing authorities doing more audits."
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