The reduction in the number of malpractice claims against CPA firms in 2004 and 2005 has led to a softening of today's market, according to several of the nation's insurance providers."It's not exactly soft, but it's softening," said Gary B. Sutherland, chief executive of Framingham, Mass.-based North American Professional Liability Insurance Agency.
"A number of major carriers have done rate decreases, and most of my accounts are coming in with no rate increase or a decrease."
Mike Warshany, an account executive with the West Orange, N.J.-based Jamison Insurance Group, said that now is the time for CPA firms to review their coverage. "It's a soft market right now," he said. "Firms should review their coverage and make sure that it is competitive with the market."
Sutherland posits two reasons for the softening. "One is that claims from audits of publicly traded companies have not been as severe as we once thought they might. The other is that there were a number of situations where we thought the economy would drive up claims against accountants that do personal financial planning, and that never really materialized."
"Overall, the insurance market is definitely softer than several years ago, but from our perspective it never did get hard in comparison to other lines," said Michelle Duffett, chief executive of Geneva, Ill.-based Insight Insurance Services. "The pricing stayed more even compared to other lines."
"There have been a number of new entrants into the market over the past few months, and this has created more competition," added Rickard Jorgensen, president and chief underwriting officer for Ridgewood, N.J.-based CPAGold. "However, the quality of the product offered by these new insurers should be carefully evaluated against what is available from the more experienced carriers."
Jorgensen noted a number of new exposures facing CPAs in connection with identity theft and the release or disclosure of client information. "Protecting clients' information is paramount," he said. "Accountants e-mail returns, keep records on an electronic database and are vulnerable to hacking. In the digital age, you have to do your best to observe Web security protocol. The extent of damage could be as little as having a credit monitoring service keep an eye on your client's credit record, but multiply this by 1,500 clients and it turns into a big problem."
Jorgensen noted that attest work for public filers was also an area of concern. "It was perceived as an area of significant exposure for insurers over the past couple of years, but with services like audit analytics, it's easier to figure if a particular firm is serving high-risk clients. This means that the marketplace for Securities and Exchange Commission attest work has become less stringent. They're still going to do underwriting, but a couple of years ago you couldn't get coverage or it would cost a lot. The underwriters are becoming more flexible."
Duffett noted that the projected backlash from Sarbanes-Oxley has not materialized. "About two years ago, we expected an uptick in claims from SOX and a trickle-down effect for all accountants. To this point, we really haven't seen that."
"The profession as a whole has really stepped up and recognized the difficulties," she said. "We have seen clients on their own make sure they were independent of audit clients and follow the guidelines without being forced. Continuing education and publicity from the recent scandals have made accountants aware of potential problems, and they have taken the steps necessary to make sure they don't get snared."
"We tend to see a fair number of estate tax return problems," she said. "My guess it that accountants just don't do as many of them as others, and therefore they're not so familiar with them. We also anticipate more embezzlement claims - for failure to detect fraud in clients' offices. It's really a reflection of the state of the economy. With gas prices up, shipping and everything else goes up. It does not matter if the accountant is doing a full audit or simple bookkeeping. We have also seen claims where someone in the accounting office was embezzling, but those are rare."
Jorgensen agreed. "We've seen a number of cases where employees of accounting firms have been misappropriating client funds, and we have a number of claims arising from the personal financial planning arena, including something you wouldn't have expected - market timing."
"It shows that when firms are diversifying into areas beyond their core expertise, they will get claims arising from these areas," he said.
THE MARKET CHANGES
Joe Wolfe, assistant vice president for risk control at CNA, the underwriter for the American Institute of CPAs' Professional Liability Insurance Program administered by Aon Insurance Services, observed that the nature of the marketplace is changing as a result of the approaching retirement of the Baby Boomer generation.
"The mix of services that CPA firms are pursuing in that part of the market is starting to change," he said. "We see and get more inquiries about business valuation services and buy-sell consulting work. There are many privately held businesses in the U.S. where the owners are approaching retirement and need help in transferring the business. There's also an increased need for estate planning and succession planning work, as well as trust work and investment advice."
"We're still waiting on the SOX 404 consulting work that will be taking place for the small-cap public companies," he added. "We have not been seeing any 404-related claims arising out of the earlier non-small-cap work, but it's a bigger concern for us, since we insure more CPA firms likely to get involved with small-cap problems, and small caps don't have the resources to invest in internal controls the way the larger companies do."
"We're seeing the tail end of the results of the accounting scandals and legislation that made the profession more complex," said Chris Piety, vice president of claims for Redwood City, Calif.-based Camico. "The long-term effects are that it's more complicated to do the same kind of work we did in the past. These complexities have pushed work from the Big Four to our policyholder base."
As a result, he said, practice management is more important than ever before. "We emphasize to our policyholders the importance of client screening, designing the engagement properly and implementing the engagement," he said.
In the near future, Piety believes the change in the preparer penalty from a "reasonable possibility of being sustained" to a "more likely than not" standard will impact how CPAs practice with taxpayer clients. "The patenting of tax strategies also has the potential to complicate things," he said. "It doesn't make sense, but the regulators and the legislators haven't been convinced to change it yet."
A new twist in business failures is bankruptcy trustees suing under the theory of "deepening insolvency," said Piety. "Bankruptcy trustees across the nation are doing this," he said. "The theory is that the accountant should have seen the company was heading toward insolvency and advised them to shut down early to limit the losses. Many states don't recognize this, but trustees are alleging the theory and not saying they're alleging it."
"We're fighting this," he said. "It amounts to a last-ditch attempt to put something in the bankruptcy estate, and it's another misguided attempt to make CPAs the guarantors of a company's financial results."
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