Firms have found themselves in a more litigious environment, with companies
willing to sue if their accountants fall short of their expectations, writes
There is little doubt that capping auditor liability is going to massively
reduce the chances of a Big Four firm – and any others – failing in the event of
another corporate Enron-like collapse.
And with problems in long-standing areas of risk now taken care of, firms
have begun to take advantage of the opportunities offered by the market to widen
their services by including business advisory and corporate finance.
However, these areas of very lucrative growth have not come without an
equally large amount of risk, says Patrick Strange.
Strange, an AON executive director responsible for the larger end of
professional services business including accountants, says this is especially
true as more clients look to their accountants to assume different roles.
‘The consequence of this scenario is increased risk. The accounting
profession is very competitive and has recently been engaged in several mergers.
Firms are competing for limited business, even between smaller firms and the Big
‘There is this pressure to chase business, but the ability to absorb the
business is dependent on the teams of people the firms recruit. The higher risk
factor lies in their laying out investment in recruiting people who are not as
good as they say they are,’ says Strange.
But the level of competition in business extends beyond obtaining the best
people in the field, into the ability to diversify and offer a range of services
to meet business needs.
Strange says this adds another risk dynamic, especially as the new
diversified services are not traditionally part of the accountant’s remit.
‘In order to be more successful – and this is not about low-balling – firms
have to be diversified in the services they provide. However, the diversity of
the client could also involve quite a high level of risk exposure. Diversity
could be influenced by the geographic location in which the client operates. The
firm has to determine whether it has the resources to deal with this.
‘In the case of multi-nationals, the question that would arise is who the
ultimate owner of the client is, what their aspirations are and, therefore, what
expectations they have of the firm.
Roles that include basic auditing of stock and tangible goods have always
been part of the accountant’s responsibility, and still are across manufacturing
But this role has also been affected in markets such as the UK, where
businesses have less to do with tangible commodity and more to do with services
‘New risks have arisen from the way in which clients are devising their own
business schemes. Instead of the traditional manufacturing industry, firms now
have electronic data that has to be reviewed and advised upon. In a way, this
places greater demands on the accountant in so far as their assessment role
goes, as it comes with the risk of tampering, more so than tangible stock,’ he
Tax will continue to be an area of high claim levels, with the more complex
tax environment fuelled by an anti-avoidance regime. Strange says people are now
more aggressive in their expectations of saving in tax. Even large corporations
will go to the lengths of suing their accountants if they have missed a
Managing director at Alexander Forbes, Mark Bracher, says that tax continues
to be one of the areas in which the most claims are received ‘because of the
complexity of the tax system and the pressure that comes with keeping up to date
with current and new tax legislation. Basic claims still emanate from areas in
which returns are not sent in on time to those such as inappropriate tax
planning advice, through to trusts,’ he says.
Firms are also now asked to provide advice on industry-specific regulation.
And if this is not provided adequately, it could open up a potential
floodgate of litigation.
‘Firms themselves operate within a very heavy regulatory environment and need
to ensure they keep themselves on top of these at all times,’ says Strange.
‘Clients, however, are turning to the firms more frequently, expecting them
to address their industry-specific client needs.
‘This could mean anything from complying with rules within a specific sector,
to meeting regulatory requirements within a particular geographical region.
‘We’ve seen few claims in business recovery and liquidator insolvency cases.
I think claim trends will depend on the state of the economy and the kind of
professional teams a company has on board,’ says Strange.
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