Risk Management and Responsibility for Accountants
By Phil D’Rozario, Business Development Manager at Accountancy Insurance (AI)
The Accountant’s Equation: Responsibility = Liability = Defensibility
Anyone providing professional advice, no matter how experienced, is at risk of being sued for negligence or breach of professional duty (duty of care).
This is designed to raise awareness of relevant issues which are faced on a daily basis by respective professionals and should sharpen a professional’s mind to the various aspects of an accounting firm that are susceptible to risk and the possibility of a claim occurring. Long-term, this awareness should actively reduce the risk and exposure for a claim of such nature to occur.
The reliance on accountants to be acutely aware is more prevalent than ever before. This is due to the dazzling array of taxation issues, complexities of regulation and compliance for businesses, the demands on accountants for financial guidance and the increased sophistication of reporting and tracking by the Australian Taxation Office.
Receiving a writ alleging a formal statement of claim that an act of negligence or an error has occurred is enough to strike fear in anyone. Now more than ever, clients are much more aware of their rights to make a claim and are less afraid to act on a threat of negligence claim if it will achieve an outcome or financial objective.
An accountant has a duty of care when providing advice or services to ensure that the advice or services provided are suitable for the client and for any reasonable person in that position at the time of providing such advice.
The role of an accountant or advisor is complex; you should advise your client and make recommendations but you should not make their decisions.
What can you do differently to reduce the risks and exposures of litigation and claims?
Implementation, Systems, Controls, Templates and Review Audits
Systems, procedures and standard templates are one of the most efficient and effective ways to provide an overarching layer of litigation protection for your accounting practice.
Ensuring proper regular review of supervision systems and quality controls may require, in some instances, completely rebuilding your systems to minimise the risk of negligence and ensure your firm has a robust high standard.
As an example, by using up to date standard templates and workflow papers, you can greatly assist in reducing the risk of a claim or an error occurring, which can lead to being sued. It is crucial you ensure that everyone knows about the documents and where to find them, coupled with efficient and regular training. A claim will usually arise from the person who stands up and says “well I didn’t know” or “nobody told me!” Make sure that all staff are on the same page in this respect.
Internal audits and reviews should be conducted regularly. Self-reviews of files are extremely important too. Set up and use a ‘test dummy’ client to see if the procedures and checklists that you have implemented actually work before you incorporate it into your business standard procedures and roll it out to all of your client base.
Accountancy Insurance is a strong advocate of accounting firms using up to date standardised workflow papers and templates as a direct measure to reduce the risk profile and potential for errors to occur within the day to day work of an accounting firm. This in turn reduces the exposure of an error in the daily workflow and makes for a more compliant, more efficient and more protected accounting firm, which is what an insurer likes to see from a risk management perspective. Demonstration of robust systems could also mean that a good insurance broker may be able to negotiate more competitive premiums based on having a lower risk profile as a firm.
File Notes and Clever Client Engagement
File notes, letters of engagements and disclaimers are the only elements that will give you a fighting chance to tell your side of the story. Clear, concise and accurate file notes are absolutely critical after each meeting or discussion with your clients where actions are agreed or advice is given.
Clever client engagement starts at the beginning of the relationship but it’s never too late. Your letter of client engagement should be a living document which sets out the rules of engagement with your client and is regularly updated and follows the life span of your client to clearly advise them of your service provision, costs and importantly what you expect from your client in return for you providing your services for example their responsibility to be timely with providing information and not give things to you the day before a lodgment date.
Engagement letters should not be viewed as a burden but as a value added tool which clearly sets out the value proposition between you and your client. It is also an opportunity to state the rules you are providing to your client. If a client can clearly see the value in something then they have no objections to paying for something.
If you don’t have a disclaimer, get one! Disclaimers can provide more defence if there is a possibility you may be sued. Whilst this will not limit the potential for a successful claim of negligence because the determination will be based on the circumstances as a whole, it could carry some weight. Make it bold and precise and brought to the notice of the person whom you are providing the services to.
Example of a disclaimer: “Whilst this article is the expressed views of Accountancy Insurance and the author, do not rely on this to undertake strategies or changes to your business operations as this article is limited in what it can or can’t say and has not considered your personal or individual business circumstances.”
If you have a client who complains, is difficult, doesn’t comply with their compliance obligations or wants you to do things which could question your reputation and good standing, put the responsibility back on them in writing and if necessary let them go. You can’t do good business with bad people! If you cannot meet the ongoing obligations because the client is difficult, put the issues back to them and move them on.
Professional Indemnity Insurance is the fallback protection required to insure risks, which still exist on a day to day basis for any accounting firm. Choosing the right provider is extremely important and understanding your insurance and risk managing your exposures will help in treating the risks within your accounting firm. By maintaining a high quality adequate PI insurance policy and by using an insurance broker who understands the complexity of your specific profession, you can rest assured and get on with your work. Utilising the abovementioned points should enable you to identify some simple yet effective changes to be made which can reduce your chances of being sued.
Whilst PI insurance is just one cover that every accountant must have, there are other insurance policies that should definitely be considered in order to reduce risk within the practice, such as cyber crime, employment practices liability and audit insurance.
By simply offering your clients the value added opportunity to participate in an Audit Shield service, you can effectively risk manage and reduce the potential of fee disputes which can often escalate to a PI counter claim related to an Audit, investigation or review and maintain healthy relationships with your clients even through a tough stressful time.
In the event that a claim does happen, make sure you have the adequate insurance covers in place with a broker you can trust to handle the whole claim process properly and who has your best interests at heart.
Phil D’Rozario is a Business Development Manager at Accountancy Insurance (AI). For more than fourteen years, Phil has specialised in providing Professional Indemnity Insurance, Tax Audit Insurance, and risk management advice to accountants. Established in 2003, Accountancy Insurance has been delivering Professional Indemnity Insurance and Tax Audit Insurance solutions to accounting firms and sole practitioners across Australia and New Zealand. Today, they proudly serve over 2,000 accounting firms.
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