By Roger Russell
While post-Enron legislation and regulation has changed the complexion of professional liability insurance for accountants, there hasn’t been a major shift in claim activity in the areas with the most frequency or severity of claims.
“Tax still has the highest frequency of claims — that has not changed,” said Suzanne Holl, director of loss prevention services for Redwood, Calif.-based Camico. “Audit services are low in terms of frequency, but the average amount is higher.”
“There has not been a major shift in claim activity,” agreed Ken Mackunis, president of Aon Insurance Services, the administrator for the American Institute of CPAs Professional Liability Insurance Program.
Financial planning has emerged as the practice area with the greatest rate of increase in claims, insurers say. Although personal financial planning and investment advisory services represent a small percentage of total billings for most firms, both the frequency and severity of claims are worse than average in comparison with other areas of practice, according to statistics supplied by Aon.
A number of insurers have pulled out of the market, according to Ric Rosario, vice president of risk management for Camico. “The marketplace got overcrowded, and some of the ones that weren’t disciplined tended to underprice and it caught up with them. The ones that stayed in had to increase premiums to cover shortfalls.”
Meanwhile, Sarbanes-Oxley legislation has generated concern among insurers.
“SOX has created uncertainty as to how it will play out,” said Mackunis. “There is some apprehension among underwriters as to how the courts will eventually interpret its provisions.”
“The scandals that caused SOX to be put into place still have the insurance market very concerned about Securities and Exchange Commission work, agreed John Dodsworth, president of Camico. “While Sarbanes-Oxley is not as reactively hot-button as it was, the fallout from all of that has not been quite sorted out.”
“On the one hand, SOX shifted more liability back onto the companies to make sure their financial statements were correct, and that will help accountants because companies have more incentive to make sure that statements are straight up,” he said. “But one of the consequences is that the Big Four have been going through their client list and getting rid of clients they thought were too small or too risky.”
“Some of the middle-market firms have seen this as an opportunity to expand their practice,” he continued. “That’s fine if they know what they’re doing, but if they don’t have the expertise it can be extremely risky. The insurance marketplace is paying a lot of attention to the issue of firms looking to get into SEC work.”
A firm that wants to take on new clients should carefully analyze the risk, according to Joe Wolfe, assistant vice president of risk control at CNA Global Specialty Lines, the underwriter for the American Institute of CPAs’ Professional Liability Insurance program.
“In vetting the clients, they should be looking at where they are in the industry in terms of management and culture, as well as the financial status of the client, and whether there is a history of misstatement or a frequent change of auditors,” Wolfe said. “We stress that CPA firms make sure they have adequate industry experience.”
“More small and midsized firms are working with public companies now than in the past,” said Kyle Nieman, vice president of CNA Global Specialty Lines. “Section 404 is creating the opportunity for them to pick up this kind of work.”
Although SOX doesn’t require it, Wolfe noted that more public company audit committees are asking that tax work be performed by someone other than auditors. “This is a business opportunity for a number of firms,” he said.
“We’ve also heard of more private companies asking that their audit be performed according to Public Company Accounting Oversight Board standards,” he said, “but we don’t know if this is the beginning of a trend.”
For firms getting into new areas, it is extremely important to review all the risk management issues related to the new businesses and any conflicts that might exist, according to Steven J. Insel, an attorney with Los Angeles-based Jeffer Mangels Butler & Marmaro LLP.
“The real problem arises when there are personnel in crossover situations wearing more than one hat,” he said. “For example, an individual CPA might be doing an estate plan in his role as a CPA, and at the same time be an ‘associated person’ with a broker/dealer, an agent associated with an insurance agency owned by the accounting firm, and rendering services as an investment advisory representative — possibly all with the same client.”
Know your policies
Insel advised clients to get “plain English” assurances in writing from their carrier before they assume anything about coverage. “It can be quite sobering,” he said, “especially when they haven’t reviewed it in a number of years, and riders have been added over a period of time. In almost all cases, those riders involve exclusions from the policy.”
“I’ve seen many clients that paid for a policy based on a binder and they may not get the policy until six months later, and no one at the firm ever read it,” he added.
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