2020 Malpractice insurance guide: Rising risks, slowing claims
The COVID-19 pandemic has opened new areas of potential liability for accountants, as well as exacerbating existing areas, say industry observers. At the same time, it has delayed resolution of many claims as a result of court systems slowing down.
(See our 2020 Malpractice Insurance Buyer's Guide.)
“We just received notice from one large jurisdiction that all civil trials are postponed until next year,” said Bill Thompson, CPA, president of CPA Mutual Insurance. “Criminal cases are being delayed, so they’re pushing back on civil cases. This is true in most of the states — some are just now beginning to reopen.”
The upshot is that cases that might have been resolved are now less likely to settle, Thompson indicated. “It delays the whole process,” he said. “Claims are tougher to settle because there’s no incentive. Sometimes plaintiffs will settle before trial because they think they’ll get an adverse verdict, but that incentive has been pushed back. These can go on for years — most accountants have no idea how long these matters are open.”
Tax is still the most frequently litigated issue, although not the largest, according to Thompson. “Much of it gets back to firms not filing returns on time,” he said. “They file late, miss deadlines, and incur penalties. Those are some of the most frequent claims we see, and they’re the most easily avoidable.”
“And we may see an uptick in claims a year from now when some of the COVID issues, like PPP loans, raise their head,” he predicted.
“The ramifications of the PPP and issues of tax deadlines and extensions have created a ton of upheaval this year,” agreed Alvin Fennell, vice president of business development and underwriting at Aon, the national program administrator of the American Institute of CPAs’ Professional Liability Insurance Program.
“The majority of accounting firms are working with small businesses,” he said. “As their clients struggle, they will feel the pressure to do more and to be more flexible. They should make sure that engagement letter creep is really monitored, and place more emphasis on communication and documentation with their clients.”
“There has been a lot thrown at CPAs in the last eight months,” Fennell explained. “Some of their clients have had to cut back on staff, and they’re leaning on their CPA firm to do more of the internal functions within the company. It’s easy to fall into the trap of making decisions with the client’s staff, and all of a sudden the staff is looking at the CPA as if they’re managing them. They may get involved in hiring and firing decisions, signing off on a contract or making business decisions. They have to be careful not to step over the line of objectivity and become part of the client, rather than an objective consultant to the firm.”
“On the other side, there is the basic management of billing,” he said. “If there is a lapse in monthly or quarterly billing, all of a sudden the client will be faced with owing a large sum of money, and suing the client for payment invites counterclaims.”
Coronavirus-related legislation provided tremendous opportunity for accountants to help their clients, but it also generated risks, according to Stephen Vono, senior vice president at McGowanPro. “Potential issues include the PPP deduction and forgiveness, net operating loss carrybacks, and planning around retirement plan distributions,” he said.
“Another recent issue of potential liability is the Supreme Court decision inWayfairand the need to do nexus planning,” Vono added. “We’ve had a number of claims in this area where clients didn’t know they were supposed to be collecting sales tax. Once the statute of limitations runs out, the client no longer has the ability to go back and collect the tax — they are out that money and will blame the accountant for failing to alert them.”
“The CARES Act is extremely complicated but extremely useful,” said John Raspante, CPA, director of risk management at McGowanPro. “It presents many areas to engage in planning, but these are also areas that can involve risks.”
One example of risk is in retirement plan distributions, Raspante observed, citing Section 2202 of the CARES Act. This section provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans, including 401(k) plans and IRAs, to qualified individuals.
“The distributions are included in income over a three-year period,” said Raspante. “So the client takes the distribution in 2020, and includes one-third in income in each of the next three years. But what if they have very low income this year, and expect to have high income in the future? Then they would want to take the option to pay all of the tax in 2020. It’s necessary to talk it over and plan with the client.”
In fact, when it comes to the CARES Act, accounting firms are the “front line” for assisting clients in navigating through and addressing the applications for many of the relief measures in the act, agreed Suzanne Holl, CPA, senior vice president of loss prevention services at Camico.
“The true challenge for CPA firms is how to provide guidance to clients without significantly increasing potential liability risk when the information and rules for many of the relief measures keep changing,” she said. “It’s critical that firms maintain appropriate loss prevention measures to warn clients of risks and advise them of opportunities and limitations. Firms need to understand that there are moving parts to many of the relief provisions, so it’s important to consider using appropriate disclaimer language in written communications with clients.”
Cyber exposures have increased dramatically in the wake of working remotely, Holl cautioned. “It has opened new potential access points and vulnerabilities that hackers can exploit,” she said. “CPA firms are already prime targets for identity thieves, and these new vulnerabilities greatly increase the profession’s cyber-related challenges. Clever hackers have many ways of exploiting accountants facing tax filing deadlines, especially when firms have outdated software, vulnerable email systems, and inattentive employees.”
Holl advised firms to address their cyber exposures with a combination of liability insurance and cybersecurity measures. “These would include educating employees about phishing attacks, installing a secure client web portal, adding another layer of security with multifactor authentication, and avoiding public Wi-Fi or hotspots when inputting or working with personal identity information,” she said.
“Every firm should have a written security plan in place,” Holl said. “Periodically assessing the appropriateness of a firm’s security measures and safeguards in light of any changes that a firm may have had to operations, as well as any changes to potential internal and external risks to security, is a critical step to ensuring a firm’s overall cyber preparedness.”