At a glance
Even without the complexities of the current economic climate, in which accountants are being targeted by struggling businesses, company administrators and receivers, practitioners can be vulnerable to professional indemnity (PI) claims for a number of reasons.
According to Drew Fenton CPA at Fenton Green, heightened scrutiny of professional services typically occurs when businesses change ownership or collapse.
In these situations, the new owner, receiver manager or liquidator tends to rake over the coals, looking for opportunities to reclaim costs from practitioners who may have given incorrect advice.
“We live in this litigious world of ‘no win, no fee’,” Fenton says.
“There are plenty of solicitors out there looking for business, who are prepared to send that first letter and see what sort of response they get from accounting firms.”
Manage professional risks
Practitioners can – and should – take steps to reduce the risk of a PI claim being brought against them.
First, Fenton recommends a letter of engagement, vigilant note-taking and written communication with clients. “Don’t think a phone call or conversation is good enough,” he says.
“Everybody’s memory fades and the points we pick up on can be different. Everything must be in writing.”
Second, Fenton urges practitioners to steer clear of work that falls outside their area of expertise. He highlights a recent case in which an accountant was brought to task – at a cost of more than A$2 million – for providing incorrect advice in a matter that required specialist knowledge.
Business valuations and specialist tax matters are common triggers for PI claims.
In such cases, Fenton says it pays to redirect clients to firms that have expertise in these fields.
“Don’t try to manage it all by yourself,” he says. “In difficult times, bring in experts that have a specific skill set to help your client in whatever area they need.”
Third, review your client base to identify potential risks. “In the good times, ‘bad clients’ are probably going to be late payers and late with their paperwork,” Fenton says.
“If the economic tide turns, they’re the ones who will end up in financial difficulty, or who will try to bring a spurious claim against you.”
An extra layer of protection
Even with risk mitigation measures in place, it’s vital for practitioners to have adequate PI insurance.
In Australia, for example, CPA Australia members must have a minimum coverage of A$2 million with an insurer registered by the Australian Prudential Regulation Authority (APRA).
In New Zealand, members must have a minimum coverage of NZ$1 million with an insurer licensed by the Reserve Bank of New Zealand.
However, beyond having “enough” cover, Fenton says it is important for practitioners to ensure someone will have their back should a claim arise. He believes the best way to do this is by partnering with an insurance broker with an in-depth understanding of the accounting profession.
“If you buy insurance online, there’s no advocate there for you on the other side of a claim matter – you’re dealing directly with the insurance company,” Fenton says.
“However, an insurance broker is your advocate. They go to the market and find appropriate cover to match your risk profile, and if something does go wrong in a claim scenario, they can act on your behalf.”
Find out more about professional indemnity insurance from QBE Fenton Green.