With the variety and velocity of professional liability claims always expanding, knowing how to protect your firm can require some serious thought.
To determine the type of professional liability, or E&O (Errors and Omissions), coverage that best suits them, it is necessary for accountants to assess the specific risks that affect them in their business, according to Catherine Putman, product manager of portfolio management at Travelers Insurance.
"For example, tax professionals bear the responsibility of knowing and applying often complex tax laws and regulations," she explained. "They also need to know and adhere to filing procedures, and their work has to be absolutely accurate. Moreover, they need to manage deadlines and overall client expectations - those are just some of the key expectations."
"One of the exposures they overlook the most is the potential for claims from long-term clients who may even have become personal friends," Putman noted. "Another is the exposure they get from providing services outside their normal areas of practice. And the misuse or failure to use engagement letters, by not clearly communicating or documenting the scope of services being provided, can open the accountant to exposure."
An area of increasing concern is cyber-liability and data security, Putman indicated. "Due to the nature of the profession, accountants tend to have a lot of personal information," she said. "Any firm or business that is responsible for personal information is a target for cyberattacks."
Related to this is the whole concept of cloud computing, Putman observed: "While there is some recognition that security in the cloud is preferable due to the centralization of data, increased focus on security and the ability of service providers to allocate more resources to security, the CPA firm could still be liable for breaches."
CAREFUL STEPS
"The lack of engagement letters can lead to a broad interpretation of the scope of services actually performed," Putnam said. "If the scope of services changes, it's important to create an entirely new engagement letter that includes the updates."
"Things to look for in a policy are supplementary payments that cover costs that are considered a business expense of the company, including costs incurred while assisting in the defense of the claim," she explained. "And some policies cover expenses that do not result from professional services, or may stem from professional services that don't necessarily result in a claim. For example, subpoena coverage would cover the expenses incurred if the accountant is subpoenaed for documents."
"There are some claims areas that are consistently active, such as tax-related claims," said Ron Parisi, CPA, Esq., executive vice president of risk management at Camico. "And then there are claims that tend to rise and fall in frequency and severity, depending on the economy or a business environment. Recently we have seen CPAs involving clients in business ventures outside of the traditional accounting world, sometimes in family businesses, sometimes in real estate or other investments."
This is a common mistake, especially when the CPA also provides professional services to the business, he indicated.
"Everyone is usually happy as long as the deal performs well," he said, but when things go wrong, though, the CPA firm often finds itself in an ugly dispute. "The client's perception of the CPA may change. The CPA appears to no longer have the client's best interests at heart, and juries tend to sympathize with clients. ... The CPA is portrayed as the financial expert who sacrificed the best interests of his client to benefit himself."
Juries also tend to hold CPAs to standards that are generally higher than the jury standards for other businesspeople, Parisi suggested. "Even in relatively benign services, such as tax-related services, juries will often impose relatively high duties on a CPA."
Finally, it is important to know whether coverage is precluded by the CPA's insurance policy. "If the CPA enters into a business deal with a client and something goes wrong, having no insurance coverage in place for a business deal gone bad could be disastrous for a CPA firm," he said.
SPECIFIC ISSUES
The failure to file an FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) is emerging as a potential liability issue for accountants, according to John Raspante, senior vice president and director of risk management at insurance broker NAPLIA. "There are very material penalties for failure to file," he noted.
There is some concern about the Circular 230 disclaimer that formerly was appended to every correspondence with clients.
"You're no longer supposed to include any reference to U.S. Treasury or Circular 230," Raspante said. "Accountants have been calling us asking whether they should delete the disclaimer entirely. We feel that they should still put in a disclaimer but should remove any reference to Circular 230 or Treasury."
Residency audits by state revenue departments are on the rise, according to Raspante. "It's a hot area," he explained. "Agents for state tax departments have technology that can calculate cell phone hours. They can also get a 'pinging report' that shows where calls emanated from or where they were received. Most states have rules regarding physical presence for residency purposes. If you spent more than 183 days in a state, you're considered a resident for tax purposes in most states."
"The resulting taxes are huge, and the accountant gets the blame," he said. "Sometimes you can amend the return in the taxpayer's home state and take a credit, but a lot of times the statute of limitations has expired and it's too late, or the taxpayer lives in a state like Texas that has no income tax to take the credit against."
More than half of all audit claims involve fraud, according to Cherie Tolbert, vice president at independent insurance broker NFP. "Accountants' clients, and juries, think that CPAs should be the fraud police," she said. "They expect them to find anything and everything that's wrong."
Tolbert recommends finding a carrier that has a long-term commitment to the CPA industry. "Various carriers will come in and out of the market based on their profits and their profitability with claims and premiums," she said. "They might price themselves very low, take a share, leave, then come back in and raise their prices. In the meantime they leave people hanging."
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