With claims against accountants on the rise, it's more important than ever to be aware of exactly what types of activities your insurance covers, industry experts warn.

Branching out into new services and the use of social media are among those that can produce troubling risks for accountants.

"Liability produced by expanding beyond an accountant's traditional services is an emerging area," said Homer Sandridge, vice president of professional liability at Traveler's Insurance. "Most are heavily engaged in tax preparation, bookkeeping, compilation, review of financial statements and some audit. But we see a trend in clients looking on them as a great source of financial advice. ... Customers for traditional services are asking for financial advice, investment planning or some other service. At the same time, some accountants are consciously trying to expand their practice. This is a perfectly natural trend, but it has risk management problems for the profession."

"Taxes, bookkeeping and compilation are precise services, but when you get into financial planning there's no clear definition of what that means," he said, adding that one of the problems is that many accountants still don't use engagement letters for traditional services. "It's even more critical to use an engagement letter when you get into financial planning, because the client probably does not understand what he's asking you to do."

"Moreover, accountants need to look at their policies to make sure that the coverage coincides with what they do," he continued. "In some, the definition of 'professional services' includes financial, economic and investment advice, and in some those are not included."

Policies should also be checked to see if they cover claims alleging the compromise of confidential information from a client, advised Rick Jorgensen, chief executive of Jorgensen & Co., a Ridgewood, N.J.-based broker and general underwriter of professional liability insurance and related risk management services. "We recently saw a claim where an accounting firm was infected with a new version of the password-stealing botnet malware, Zeus. The botnet infected a computer at the firm that was used to facilitate bank transfers on behalf of clients to various vendors. Bogus transfers were made to banks in China before the bank realized the theft and froze the account. But the accounting firm is facing a potential malpractice claim and has a very upset client."

THE RISKS OF SOCIAL MEDIA

The explosion of social media across business and personal uses adds increased risk to firms, according to Gary Sutherland, chief executive of the North American Professional Liability Agency. "The benefits to firms can be substantial, but at the same time it opens them up to potential liabilities," he said. "If they have something on one of the networks or a blog that potentially harms another firm or maligns a product, the resulting lawsuit may not be covered under their professional liability policy. An employment practices liability insurance policy can help. EPLI has been around for years, but it's taken on new life with the rise of social media. For example, an accountant you've just hired might create a post on Facebook critical of his former firm, and they send a letter threatening to sue. An EPLI policy would protect the new firm."

"EPLI covers employers from claims against them from employee-related activity," echoed Tom Henell, chief marketing officer for NAPLIA. "But social media blurs the line between what happens in the office and what happens outside the office. It's important that employers have controls in place, such as a section in their employee handbook, that will allow them to manage it."

SOFT MARKET CONTINUES

Meanwhile, the professional liability area is experiencing a continued soft market, according to Ron Parisi, national program director for Camico Mutual Insurance Co.

"New entrants [liability carriers] focus mostly on excess [insurance], rather than primary insurance," said Parisi. "There's generally a lag period of 12 to 18 months, but we're expecting rates to harden due to claims activity in 2009."

"The frequency of claims has been rising, mostly due to the economy," agreed Jeff Day, assistant vice president for underwriting at CNA, the underwriter for the American Institute of CPAs' Professional Liability Insurance Program. "We're seeing a rise in actual claims, potential claims and requests for subpoena assistance. The good news is so far the severity of claims is holding."

"Frequency is up across all types of services," he observed. "Audit and tax are dominant. We're also watching for fraud and Ponzi schemes."

The poor economy has created additional risk due to increased competition among firms, according to Joe Wolfe, assistant vice president for risk control at CNA. "There is heavier price competition than a few years ago, when firms had the luxury of turning away clients they thought were marginal. There was more work than firms could handle based on their staffing. Now, a lot of firms have had reductions in force, and the concern is that quality suffers when you're bidding on a job for 40 percent less than what you charged previously for the same work."

The economy has also generated increased requests from lenders for "comfort letters," he observed. Comfort letters are those sent to a potential lender affirming the financial health of a company.

"We continue to get inquiries from all over the country from CPAs where lenders to a client are asking the CPA to author a comfort letter," he said. "Lenders are looking for verification of income from someone other than the borrower, to assure that there is sufficient cash flow to service the loan. In most cases, the answer should be that the CPA can't supply this information unless the client wants to engage him to perform the procedures and generate a report. It should be a separate engagement."

For more on protecting your firm from Internet attacks, see the expanded version of this article on AccountingToday.com.

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