With confidence in auditors currently at rock bottom, Emile Woolf, chairman of the ICAEW professional indemnity insurance panel, said: ‘There’s a huge number of misconceptions about the nature of the insurance of which accountants are obliged to seek.’
He told a seminar hosted by law firm Reynolds Porter Chamberlain last week: ‘Few firms fully understand the concept of taking over another practice, for example.’
Besides negligence claims against auditors, Woolf pinpointed two other potential pitfalls where accountants continually fall foul of insurers. In takeovers, Woolf said accountants imprudently believe any past liability remains with the firm that had been taken over. But unless there are specific exclusion clauses stated in the agreement, the new firm would be liable, he told the seminar.
And Woolf said firms are still not clear on the differences between ‘aggregate cover’ and ‘each and every cover’. The latter covers each claim.
‘All they want to do is have a cover that complies with the rules and nothing else. They don’t even read the policy,’ warned Woolf.
Woolf insisted these misconceptions were not just limited to small or sole practitioners, but to firms of all sizes. Lawyers also emphasised the importance of engagement letters, particularly for auditors.
Alex Hamer, partner in insurance services at RPC, said engagement letters should outline the services to be performed, responsibilities of the client and restrictions on any work that was to be undertaken.
‘There’s a huge expectation gap between auditors and clients as far as what they can provide. A letter of engagement should not only define the terms of the engagement but should also manage client expectations and protect the accountant in the event of a dispute.’
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