Threats: outside influence

Professional indemnity

The accountancy profession prides itself on the quality of its advice
provision and breadth of services. Unfortunately, for every type of advice there
is risk attached.

Traditionally, the main areas of advice that have led accountants to face
litigation have been in tax and audit. ‘For the sheer number of claims, it has
been tax [as the most popular], while for size of claim it has been audit,’
explains Jane Howard, a partner at Reynolds Porter Chamberlain and specialist at
defending claims against accountants.

Regulatory shifts also have a big impact on where insurance cover is likely
to be required, and changes to audit engagement could see audit liability, which
has traditionally been the biggest area of risk in accountancy, capped.

Although the taxman is much more aggressive in dealing with the provision of
tax avoidance schemes, and schemes must now be disclosed to HM Revenue &
Customs, this is expected to reduce the number of aggressive schemes to a point
where very few tax advisers risk punting such schemes to clients.

‘Firms are more cautious about tax scheme promotions. There should be fewer
“whizzy” schemes going forward, so perhaps there’ll be fewer claims as well,’
says Howard.

As the business world and global economy changes, so do the types of service
provided by firms, and also the geographical points of call. The growing Chinese
economy, for example, provides great opportunity and risks. ‘It’s an issue of
client acceptance, whether to take on a client: expansion is always risky,’ says

Simon Konsta, a partner in Barlow Lyde & Gilbert’s professional liability
and commercial litigation team, warns that the emerging markets are a potential
problem for firms, as accountants face dealing with different cultural
approaches to reporting and ethics. ‘You have to be extremely careful on
assurance and capital raising services,’ he says.

The economy is solid, but some would say there is potential for a slowdown.
With the incredible amount of debt finance, and new owners of businesses looking
for a quick return – particularly those from private equity – advisers could
take the blame for badly performing businesses.

This creates a number of potential pitfalls. Advisers providing corporate
finance and due diligence services could face claims if an acquired business
‘wasn’t what was expected’ by the new owners, warns Howard.

Despite the minefield that advisers must enter to provide services, both
Howard and Konsta see a much more savvy profession in the future, better at risk
management, putting together engagement letters and, for auditors, entering into
liability arrangements.

‘[Managing] contractual terms, [quality of] firms’ in-house legal teams, they
are much better focused on risk management and bad clients are being weeded out
– the firms continue to get stronger,’ says Konsta.

Networks and associations

Accounting firms usually operate within networks and the links between the
firms can be problematic. The closer firms are linked, the more likely it is
that litigation in one locality could put the other firms into a position where
they could face liabilities as well.

These issues affected the Big Four accounting firms to such an extent that
they are now uninsurable for audit liability.

‘When a firm gets into trouble abroad, will the UK operation [linked by a
network] get dragged into foreign litigation?’ questions Barlow’s Simon Konsta.
‘Make sure you’re certain of quality control and competence of the firm in that
region. Be comfortable that association reduces the nature of the relationship
and is properly documented, so one is not part of a broader partnership.’

Networks can be your best clients, but conflict of interest issues must not
occur when new rules are introduced next year.

‘If you share a logo, then you may have to carry out a conflict check,’ says

Claims culture

While advisers are much better at managing their risk than in the past, the
claims culture has filtered across the pond from the US and there are signs that
some models encourage claims where they may not have occurred in the past.

Litigation funding, conditional fee arrangements (CFAs) and legal costs
insurance create a climate that encourages clients to go for speculative claims
against accountants, believes Konsta.

Litigation funding involves third parties bankrolling legal action, in return
for a share of the potential damages. While with CFAs, lawyers will accept a
certain fee on condition of the outcome of a claim.

‘Claimants can insure to cover costs. It all has the potential to be
oppressive against accountants and distort the economics of litigation,’ says
Barlow’s Simon Konsta.

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