Troubled economy, new standards may spark rise in liability risk
The current economic downturn and the uncertainty of the timing of a rebound will more than likely trigger an increase in the number of professional liability claims.
"We've seen an increase in frequency of potential claims and requests for subpoena assistance," revealed Jeff Day, assistant vice president of underwriting for CNA, the underwriter for the American Institute of CPAs' Professional Liability Insurance Program. "We do expect some carriers to make changes to their programs and possibly even leave the marketplace."
Clients are less tolerant of losing money and employees are more likely to steal money when times are tough, noted Michelle Duffett, chief executive at Geneva, Ill.-based Insight Insurance Services. "Our biggest concern is with defalcations," she said. "Invariably, a lawsuit says the accountant should have caught something before it happened, regardless of the level of service the accountant was engaged to perform. We've had lawsuits against accountants where all they did was prepare tax returns."
"As far as our advice goes, nothing has changed," explained Joe Wolfe, assistant vice president of risk control for CNA. "This isn't the first time the market has gone through a down cycle, and when it does, we expect to see an increase in claims activity. However, there are a couple of things that are different. The scale of the economic downturn is bigger, and from a professional perspective, there are a lot more standards that accountants have to deal with now than 10 to 15 years ago."
INSTITUTE EXPANDS COVERAGE
The AICPA program recently expanded its coverage to include claims alleging identity theft in rendering professional services, and client network damages alleging a security breach in rendering professional services, according to Alvin Fennell III, vice president of underwriting and sales for carrier Aon, the administrator of the program.
"We've noticed a trend of CPAs taking on clients and reaching out in areas that they may not have expertise in, or where two or three years ago they would not have accepted them," he said. "It's important to use and structure the engagement letter to mitigate risk, specifically in what services to render on a payment schedule and what happens on a failure to meet the payment schedule. Delinquency fees and the withdrawal provision need to be pretty specific."
In a discussion of fee-related suits on the program's Web site, CNA noted that suing for fees significantly sharpens the risk that a CPA firm will face a counterclaim for professional liability.
"Fee suits place the CPA firm at risk for professional liability claims and business losses in the form of litigation expenses and lost professional time that may outweigh any potential recovery in court," it stated. One of the most effective ways to avoid fee suits is to resign from a client engagement before the outstanding bill grows large, CNA warned.
"Now is the time to evaluate your relationships with every client you have," advised Ronald Parisi, national program director at California-based Camico. "Determine whether you have a good relationship and a shared trust with each client. Anyone that gives you a bad gut feeling is someone you need to consider disengaging this year."
"There is a tendency when times are good to get aggressive in bringing in new clients, while client retention comes to the forefront in bad times," echoed Camico chief executive officer Ric Rosario. "Accountants have a tendency of being very loyal. If a client has been with them for many years, they can easily get strung out on trying to help them. The problem is that there's a fine line between loyalty to the client and going down with the ship. Sometimes accountants have to guard against losing their objectivity in situations where the client gets desperate."
OTHER GROWTH AREAS
"One of the things we're concerned about is competition among CPA firms," said CNA's Day. "Mergers and acquisitions are on the rise, and historically. these have caused some problems by the way they're managed."
"There's the temptation to take on consulting work or branch out where a firm doesn't have expertise. Business valuation and litigation support are of particular concern," he explained. "The reason for this is that in tough economic times, there's more business valuation work going on because more companies are for sale. Historically, our claims in this area are either that the accountant lacks experience in valuations, or is taking on an engagement in an industry with which the accountant is unfamiliar."
Litigation support is seen as a potential growth area by firms that don't have the necessary experience, Wolfe observed. "Divorces are on the rise, and accountants are often asked for litigation support in a divorce for an existing client. We've been telling them for years that it's not a good idea."
As a result of the economic downturn, there will be numerous clients with foreign-income issues, Wolfe said. "Those issues will vary, but there's a need to use caution," he explained. "Some of these clients may in fact be exposed to criminal prosecution, and there is a difference between the accountant-client privilege and the attorney-client privilege. If you're being asked to advise a client on these issues, you should consider whether you should be engaging them directly or through an attorney, so the privilege will be protected."
On the audit side, Wolfe said that going-concern and subsequent-events issues were critical. "Most practitioners are familiar with these, but it's important to raise them anyhow," he said. "In the private company world, there's a danger when the fieldwork has been completed and you're sitting on the audit report. To the extent that auditors become aware of subsequent events that occur after the date under audit, they can't ignore it. Likewise, when accountants discover facts that warrant a going-concern statement, they have to resist clients who might plead with them not to issue the statement but to give them time to rectify the situation."
(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.
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