Ric Rosario is stepping into some big shoes at Camico Mutual Insurance Co.
He took over as CEO of the CPA-focused liability insurance company on January 1 from John Dodsworth, who had been chief executive ever since founding the company in 1986. Dodsworth plans to retire at the end of June, but will remain a board director. Rosario has worked closely with Dodsworth since joining the company in 1992.
Rosario is a Certified Fraud Examiner with experience in public accounting and private industry. He advises Camico’s member-owners and other CPAs on loss prevention principles and techniques. His duties at Camico also include executive oversight of underwriting, program development, and marketing and communication operations for the company’s policyholders.
Rosario’s public accounting background is in the audit division of the regional firm of John F. Forbes & Co. He later joined a start-up real estate venture as controller and completed his tenure there as chief financial officer.
Several of his articles have appeared in national publications, and he co-authored the CCH-published books CPA’s Guide to Loss Prevention Practices and CPA’s Guide to Effective Engagement Letters, 7th Edition. Rosario is also active with many state society and AICPA committees.
Is it difficult stepping into John Dodsworth’s shoes after he had been running the company for 22 years?
I’ve been here at Camico 17 years, and actually John Dodsworth and I have worked together for many decades, even prior to Camico’s existence, at a CPA firm in San Diego in the 1980s. You might say we’re cut from the same cloth, from the point of view of servicing the customer, our commitment to the profession, really our sense of the importance of the accounting profession as it relates to servicing business. Although we have different styles, we share many similar core beliefs. The succession plan was put into place many years ago and effectively the transition was a non-event, as it relates to our customers, employees and key vendors.
What are some of the top liability issues facing accountants these days?
We’re in for a pretty significant change in the accountants’ liability area related to the uncertain economic times. When the economy is booming and accountants are doing really well in their business, their focus has been more on marketing, attracting qualified staff to get the work done, keeping up with technology, a lot of practice management issues that are related to booming times. I think you will find a shift will occur, now that the underlying economy is in a recession. The issues that accountants will have to pay attention to are that their clients are in trouble, and many of their clients are teetering on the edge of bankruptcy. Many of their clients are going to be in very dire economic conditions, and accountants want to not only help their clients but also make sure they don’t go down with the ship. For a lot of clients, their balance sheet is under attack. Their balance sheet could be very well be 30 or 40 percent underwater as a result of the equity market. That could trigger problems where the company has loan covenants with the bank and they are required to maintain certain ratios to keep the bank happy. If the balance sheet ratios start falling apart, that may allow the bank to call in the loan, and that would in turn cause capital issues for the client. We haven’t seen that kind of problem in a long time because the clients kept growing and growing.
Another good example would be accounting for going concerns. Those haven’t been a big issue for a long time for accountants. Clients weren’t going under. Now accountants have to ask, “Is this client going to survive? Do I need a going concern assessment not only to protect the client, but also myself?” These are all the accounting issues that are going to come to the forefront: going concern, valuation of intangibles, loan covenants, reserves, bad debts, revenue recognition, related-party transactions. All of these are fundamental financial issues that have been covered up with all the go-go ’90s success. That is one area that will be emerging very quickly as the uncertain economic times take hold.
The second area that we have already seen, and we’re going to see more of it, is fraud. Frauds get uncovered in bad times. The Madoff matter is only by sheer volume the biggest we’ve ever seen. We’ve already seen several other frauds get unraveled. The economy is like the tide coming in and out. When the tide is high, it covers everything, but when the tide recedes, like in the recession, it uncovers all the garbage and trash that have been under the surface, but no one has been able to see. When the recession pulls back and uncovers these frauds, they fall apart and they no longer can operate. We’ve seen this trend in a prior recession. In the ’90-’91 recession, we saw a huge amount of frauds fall apart. The accountant needs to have a change of mindset from the good times to the troubled economic times. It requires a different perspective in being much more diligent in applying accounting standards and accountant skepticism. I think we’re going to see a significant shift in how the accountant’s mindset is going to be needed to deal with these uncertain economic times.
Do clients pose much of a liability risk to accountants?
Yes, it’s a pretty well known fact that when there are bad economic times, the risk exposure to CPAs goes up. How much depends on what kind of risk management is put in place by the CPA firm and how well they practice risk management. With good risk management, you can mitigate or eliminate risk, if you’re paying attention to what’s happening. The question is, has the CPA done anything in their practice to minimize risk? They need to recognize that times have changed. To what extent has the client they work for gone from a good or stable situation to a negative situation? If the client gets into trouble, what kind of communication is necessary for the client as relates to their finances? That interaction needs to be documented. It really varies depending on what level of service we’re talking about. Are any of these fundamental accounting issues now in play, like going concern or asset impairment? That would be just a starting point. Then what kind of advice should you be giving to clients and how well is it documented?
Are regulations such as FIN 48 [accounting for uncertainty in income taxes], or the standards for accounting for contingencies, causing an increased liability risk?
Not at this point. I’m not sure that those issues are going to give rise to significant changes from a liability perspective. But another aspect that’s a risk to CPAs is that when some clients get into trouble, desperate people start doing desperate things. The public has an expectation of CPAs being like the watchdog. Well-intended people over a long period of time get into troubled situations, and they start doing desperate things. Management starts doing things to manipulate the numbers, and the accountant is one of the last safeguards against that. CPAs need to be mindful of that. They very much need to be diligent in their professional skepticism.
What do you think of the auditing firm that was involved in the Madoff case?
I can’t even imagine a three-person accounting firm auditing a $50 billion operation. That’s a very unusual situation. It’s really questionable what got audited and if it got audited at all, and the appropriateness of this very tiny accounting firm auditing one of the largest [investment management firms]. That alone is a red flag. Then again, there were red flags all over the place and the SEC didn’t pay attention to any of them.
What should CPAs do when they discover fraud at a client to protect themselves from lawsuits?
As frauds become more prevalent and clients start doing more desperate things, the chance that a CPA will run into an illegal act goes up. The standards are pretty clear what the minimum requirements are. For risk protection, there are things in addition to what the standards say that might be considered with legal acts of discovery. It is absolutely critical that when an accountant runs into an illegal act directly or suspects an illegal act, they need to get either legal counsel or counsel from their insurance company, or from their risk management advisor. We’ve had some cases where the accountant suspected illegal activity, but they got no cooperation from management in trying to figure it out, and the best thing they could do was withdraw. They suspected something was wrong, couldn’t get resolution, so they basically fired the client, and they got sued anyway. There’s a whole bunch of issues. They can say that if you suspected fraud, you should have told more people. Following standards is not necessarily sufficient to keep someone from suing.
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