Current claims against accountants and risk mitigation strategies were in the spotlight at Accountex.
Professional services businesses of all kinds are facing many of the same pressures: competitive pressure from existing and new markets, greater price sensitivity of clients, and an increasing regulatory burden. The general trend is also towards higher numbers of more costly professional indemnity claims.
Accountants are no different, as I explained to visitors to ACCA’s lecture theatre at Accountex earlier this month.
Claims, and the risk of claims, play an important part in the risk profile of your firm, and can have a significant impact on your bottom line. This is a risk that therefore needs to be actively considered and managed.
While risk management is often seen as an onerous ‘bolt-on’, we need to move away from this approach. It must be proportionate, effective, and enhance your business, rather than obstruct it.
Risk awareness As the insurance partner for ACCA, Lockton has a wealth of risk data for the profession. This provides a unique insight into which areas of practice are creating most claims, and the most expensive claims. The two are often different.
Both sets of figures provide meaningful analytics for firms – in terms of benchmarking your own performance – and also in identifying the priority risk areas to focus most time and resource. Delays or errors in tax returns account for by far the largest number of claims annually, but account for a significantly lower percentage of claims by value. In contrast advising on/introducer arrangements for tax avoidance schemes account for a mere 6% of claims by number, but 23% by value.
Likewise, capital gains tax-related work, due to the high value nature of the work, costs proportionately more per claim than any other area of work, accounting for 6% by number and 36% by value of claims. How you identify risk in your practice should be a combination of factors:
reviewing and risk-grading your work types
examining the quantum of risk in individual transactions/ on average per area of practice
reviewing your claims and complaints record for trends and patterns
undertaking a gap analysis of your risk controls.
Lockton can assist with all of these stages.
Case study An accountancy firm acted for a client on an ongoing retainer basis. In addition to managing the client’s business accounts, the firm advised on a range of personal and corporate tax matters.
When the client consulted the firm regarding the sale of a small business, the firm suggested that investing in a Film Finance Partnership as a potential option for offsetting the CGT liability. They acted as an introducer for the promoter, and received 7% commission.
The scheme failed a number of years later and the firm received a claim from the client for the losses he had incurred.
This case study is typical of the types of claims we receive regarding tax mitigation schemes. Firms often believe that they, as introducers, have no liability to the client. Even had no commission been paid to the firm, as accountants/financial advisers, the presumption will be that a firm should advise – unless very clearly rebutted. Even where you exclude advice on a matter, there can be circumstances where the nature of the risk is such that you would still be expected to identify to the client that there is a risk that they should obtain advice on.
An additional wider concern is the number of firms conducting a wide range of different work for a client under a general running retainer. All too often this means that the work has not been risk assessed adequately, or the scope formalised. This in turn can lead to concerns over inappropriate limits of liability being applied, potential billing disputes, and leaves the way open for confusion regarding what is being advised on. Please revisit the ACCA guidance on retainers.
When designing Risk Controls, it is equally important to consider what type of errors (and allegations) arise. It is worth emphasising that even defensible claims can cost firms time and money, and clients. Avoiding claims in the first place often comes down to one or more of three things:
Effective scoping and engagement processes
Good administration and time management
Robust client communications
Where claims do arise, the good news is that, in the majority of cases, if handled promptly and well, clients who have a complaint resolved to their satisfaction are often more loyal than those who never complain at all. Ensuring that your complaints process is easily accessed, non-defensive, and effective (and contains a feedback loop into improving identified issues) is your next best option.
Emerging risks Wherever legislation has recently changed (such as the capital allowance rules relating to commercial property) there are likely to be emerging claims as a result of accountants failing to identify the relevant risk issues and advise accordingly.
Perhaps the more concerning emerging risk is the continued rise of frauds and scams, and the related topic of information security. Accountants often hold large sums of money and are privy to a lot of sensitive client data. Both of these assets are of great value to criminals.
Cybercrime is the hot topic of the moment – and with good reason: the latest government research indicates that two thirds of large UK businesses have been hit by a cyber-attack in the last year[i], but smaller businesses cannot afford to be complacent. KPMG’s latest fraud barometer suggests that the cost of fraud in the UK has risen by 22% over the last year[ii], while the Financial Cost of Fraud report 2015[iii] puts the cost of fraud for UK businesses at around 3% of their total expenditure.
As far as targeted attacks are concerned, phishing attacks remain a particularly high risk. The incidence of phishing attacks in the UK has increased by over 20% in the last year, according to Action Fraud[iv] – and they are becoming increasingly sophisticated (increasingly they will be a convincing formatted email from an expected sender). We have set out some tips to assist you identify phishing emails.