Professional indemnity: threats -watch your step

Whether you’re providing a business support service or engaged in core
auditing, professional indemnity is mandatory to your survival.

But as the terrain of business changes, so too has the role of the
accountant. With this comes new risk, in a variety of areas that practitioners
now find themselves involved in.

Leading insurers, Alexander Forbes, recently undertook some research on
professional indemnity insurance, in which they analysed claims and
notifications from accountants during 2005/06, comparing it with the previous
year.

Endowment emerged as a particularly hot area, second to taxation, with claims
rising from 12.3% for 2004/05 to 20% during 2005/06.

Mark Bracher, MD for its Bristol operation, which is the centre of excellence
for accounting clientele, said the work done by accountants has gone beyond
providing the core audit for a company in a vibrantly commercial market.

‘You can well imagine that this role has changed vastly in the last 25 years.
And as audit requirements have changed, so too has a particular line of income.
So auditors have had to look for new ways to compensate for this loss of
revenue,’ says Bracher.

However, this is where the problem of wearing too many caps begins to impact
on the practitioner’s risk.

‘I think making sure a person is giving advice is fully equipped with the
right level of expertise, is one way of dealing with this. Yet sometimes there
is a tendency for professionals to give advice in areas in which they may not
necessarily have expertise,’ says Bracher.

PYV’s brokers director, Nick Pointon, takes it a step further, saying
accountants often run into problems when dealing with subject matter in which
they are out of their depth.

‘More recently, the largest number of claims have come from acquisitions and
mergers. Some tend to try and do a bit of everything without realising that some
of the work should be going to specialists. This is less of the case for those
doing a high-street job, where they know their limits,’ says Pointon.

Taxation continues to pose problems in terms of claims, due to new and
increasingly complex laws, or amendments that change the way companies are
taxed.

Many claims, ranging from VAT to personal tax, emanate from returns not being
filed on time.

But it is the frequent changes that pose problems from an underwriting point
of view, with insurers now having to predict risk even further ahead than they
did 10 years ago.

‘A lot of investment takes place, which often means advice is needed. There
is always a tendency for firms to get involved, rather than take a step back and
consider whether they are in fact the right people to advise a client. It is no
doubt another opportunity to generate fees but it also means increased risk once
again.

‘It can lead to all sorts of problems if the correct steps are not being
taken, and yet the danger lies in allowing a third party to enter into the
relationship with the client, which means potential revenue going off in a
different direction.
‘But one must balance delicately the relationship of what is good for the client
and the firm,’ says Bracher.

Coupled with the high-potential of risk in the areas of business advice and
tax, is the fact, Bracher says, that we live in a litigious society.

‘Somebody is more likely to make a claim now, than they were before. From the
moment there is potential claim, we ask the accounting firm to draft a response,
which will have to be very carefully worded, putting forward their view and
denying liability. Quite often this will kill the potential claim. We have to be
careful of being un-emotive and not drawing out the matter unnecessarily.
‘Off course, it is a rather major matter if a writ arrives, at which point
solicitors are appointed,’ says Bracher.

The general accepted rule around the amount a firm should indemnify themsel
ves for, is two and a half times the annual fee income.

This also takes into account the areas of service a firm covers, as well as
inflationary figures.

‘A small matter could take six months to a year to settle. But a major case
could take anything between five and ten years. So firms have to take into
account the change of financial climate over that period. And off course when
things reach the court level, the costs rocket through the roof,’ explains
Bracher.

How to proactively avoid claims

• Ensure practitioners are suitably equipped in terms of expertise, to be
able to give out advice that is as accurate as possible.

• Take risk management seriously. The person heading up this function should
be able to get this right, not just with regards to keeping professional
indemnity claims to a minimum, but ensuring customer service is also on the
right track, which would additionally mitigate risk of claims.

• Seek relationships with other experts, which could potentially be
reciprocal, so that clients get the best possible advice and decrease your risk
in areas of service which do not form part of the business’s core functions.

• When it comes to tax, ensure diary systems are in place so that returns are
completed and filed in time.

• Consider engaging in a peer review exercise – offered by UK 200, Charter
Group and SWAT –which allows a firm to have an annual independent assessment of
whether their procedures increase or decrease risk.