In a firm’s ideal world, claims against it would not exist. Clients would be
happy, employees would not make mistakes and lawyers would be untroubled by the
distress calls of managing partners wondering how they are going to protect this
year’s profits from being eaten up by a mammoth claim.
Sadly, the ideal world does not exist, but there are ways in which you can
try to move towards it, to limit your risk and thus your professional indemnity
premiums. Want a clear claims history to show off to your insurer? Manage your
risks effectively, and you could have just that.
When considering the key points of risk management, Joanna Page of law firm
Allen & Overy, says that, well, ‘you probably know all of them already.’
She reels off a few: choose your clients carefully (obviously), have a good
engagement letter (something that is blindingly obvious to accountants more than
most these days), train people well, double check everything and have a strong
complaint handling process.
Do you need a risk manager to tell you those things? Will Glassey from
solicitors Mayer, Brown, Rowe and Maw, thinks you do. ‘A lot of it is common
sense: making people stop and think about the possibility for claims.
‘If you said to most professionals, “be careful not to send emails in a hurry
late at night”, they would say it’s obvious, but getting people to focus on
those points in regular risk management briefings is a good discipline,’ he
That is a key principle of risk management; it may seem obvious, but you may
also still have to drum it home.
So what of the less obvious points? The ones that you might not have thought
of but could still change.
One practice used by many top firms is committees to deal with difficult
‘A lot of firms have committees dealing with difficult issues. If you have an
issue on how you interpret an accounting standard you probably have a committee
that will have the in-house view so that you always have got the same view on
difficult topics. If you end up in litigation you don’t want to be confronted
with divergent views,’ says Rickard.
Glassey has some other tips. ‘Laying the paper trail is important,
documenting meetings and telephone discussions and making sure advice is
recorded in writing wherever possible.
‘Beware also the dangers of email. Beware the apparent informality of email.
Everybody is reasonably familiar with that as an idea, but it is always worth
reiterating, particularly where the firm’s accountants are issued with mobile
‘Diary management and deadlines are also important. Many of the claims that
we see arise from simple administrative ‘ mistakes, or misunderstandings or
miscommunication of deadlines. Maybe the accountant doesn’t understand the
commercial or regulatory deadline the client is working to, and one way to
address that is to record back to the client what your understanding of their
Problems can arise from management of holidays, correspondence going missing,
or not being dealt with or not being understood properly during absences and
holidays, he says.
One thing to avoid, says Rickard, is writing memos trying to justify yourself
when a claim comes in. ‘When you are notified of a claim, don’t write a long
memo saying what you have done. Don’t put anything in writing. It can be used
against you. But there’s a tendency for people when questioned or attacked to
Glassey says accountants should also be kept within their areas of expertise.
Don’t let an auditor give a piece of tax advice that a tax adviser should do, or
vice versa. That may lead to problems.
Ultimately, implementing such processes will lead to a reduction in premiums.
Perhaps not immediately, Rickard says. ‘Insurers look purely at claims history,
how many claims you have got and how you deal with those.’
So it may take a while to feed through, rather than just saying to the
insurer Ð ‘here are our processes, lower our premiums.’
And more than that, good risk management improves the service to the client,
according to Glassey.
‘Sound risk management practices are generally consistent with quality
control. Things that firms need to do to avoid claims generally also help to
improve quality for a client,’ he says.
STEPS TO REDUCING RISK
1. Choosing your clients
On choosing your clients, Page says:
‘Look for clients who are good long-term clients, pay your bills and give you
a proper instruction to do your job properly. It’s important that they don’t
just want an opinion to be used as a guarantee for their own inadequacies.’
2. The engagement letter
Almost all advisers insist that probably the key point is the engagement
Page says: ‘Accountants are generally very good at their engagement letters
because they have been through the mill.
You have to have a slick process which identifies what the job is you have
been asked to do, and puts a circle around it so it doesn’t morph into something
Jo Rickard of law firm Shearman & Stirling agrees. ‘You are setting up
exactly the ambit of the job you are taking on and the bits you are clearly not
going to take. You are making it clear that in the time available the
accountancy firm is being asked to look at A, B, and C and can’t be held
responsible for anything outside that,’ he says.
Your letter of engagement may also formally limit your liability too. As most
accountants will be aware, this is not yet possible where audits are concerned,
but soon will be when the Companies Act becomes law next year. But for non-audit
work, this could mean some kind of multiple of fees, or a proportionate
principle, rather than just being held joint and severally liable for anything
that went wrong. Where liability is concerned, there is frankly not very much
you can get past accountants, the masters in that respect.
3. Training and recruitment
While dealing with risk through training and recruitment may be obvious, what
may be less easy to pin down is how best to manage that.
Glassey says: ‘It’s important to make it a “top-to-bottom process” all
professionals within the firm need to have risk management training, not just
senior managers. You need regular updates and briefings to staff and briefings
to new joiners.’
4. Double checking
‘Use the “Four Eyes” principle, that things are signed off by a second
partner, and mechanisms used to double check quality of work,’ says Page. Simple
mathematical errors, Glassey says, can be a fertile source for claims against
5. Complaint handling procedures
Page argues: ‘Obviously all accountants will have complaint handling
procedures to report internally and to deal with things. There’s a professional
obligation to do that and it is an important way of managing risk.
Typically, something will have to be reported to the partner responsible on
the matter and a complaint handling partner too. It’s tremendously important to
get the problem solved early.
Having a culture of being open about problems is important. Complaints that
get out of control are often the ones someone sits on. It festers.’
• Choose your clients carefully
• Write a good engagement letter
• Ensure holidays are well managed and all administrative systems work well.
Might a letter go missing?
• Keep professionals within their areas of expertise
• Have a good complaints handling procedure
• Train your staff regularly
• Have an open culture of reporting complaints
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