[5 Minute Read]

While a financial crisis doesn’t necessarily mean professional advisors make more mistakes, we know from experience there is often a surge of professional indemnity claims as clients struggle to pay their bills and look to the advice provided by professional advisors to find a way out of their problems. 

Covid-related professional indemnity (PI) claims are already increasing across many professions, but accountants are particularly vulnerable to an increase in frequency (whether spurious or not) and this has consequences for their insurance arrangements. 

Why accountants are vulnerable to PI claims 

There are risk factors that all professionals must consider as a result of the pandemic including:

• Pressure on income/finances – both personal and professional 
• Increase in home working  
• Increased use of technology 

But accountants also face additional risks because of the nature of the advice they provide, for example helping clients navigate the new government schemes introduced to help businesses through pandemic (including the Coronavirus Job Retention Scheme's tax reliefs, business rates relief and VAT deferrals) or the implications of Brexit on their structure, finance and tax position. 

It’s not surprising then that the ICAEW made the following prediction: 

‘It is likely that the disruption to business and the economy caused by Covid-19 will result in an increased number of PII claims against accountants and other professionals.' (1)

Claims against accountants – what’s happening? 

In addition to the usual claims against accountants arising out of general accountancy, audit, tax, insolvency and mergers & acquisitions work, a number of new trends are emerging. 

Missed deadlines

Firstly, we’ve seen a number of claims for when deadlines to register for PAYE online during the early days of furlough were missed which meant claims couldn’t be processed under the initial scheme (March to October 2020). It does seem, however, that these teething problems were largely rectified by the time the second scheme began. 

Fraud

Fraud-related claims also seem to be increasing in frequency in relation to the financial pressure on clients during the pandemic (particularly those in sectors who were unable to trade) and the exposure it has given to longer term frauds. 

Audit

Accountants faced a unique problem during lockdown in that they couldn’t attend clients’ premises in person which made it more difficult to identify fraud during an audit, for example not being able to inspect stock levels. The FRC provided guidance about the provision of a modified audit opinion where the usual audit procedures couldn’t be undertaken, but this grey area is still likely to causes problems in the event a claim is made.

Fraud claims relating to pandemic-related schemes were made easier by how quickly they were implemented. With clients under continued financial pressure, the potential for fraud in other areas continues to grow. 

M & A

We have seen some increase in claims relating to corporate finance and mergers and acquisitions but we would expect this following an economic downturn as clients assert their accountants (and other professional advisers) have failed to advise them correctly when transactions don’t work out as expected. These claims can have substance but can also be a symptom of ‘transactional regret’. It is for the accountant to prove they did what they agreed, which is why documentation is so important – see tips below. 

Tax

While tax claims (other than in relation to covid-related schemes) have continued to behave in largely the same way as they did before the pandemic, a reduction in overall income in this area may result in a decrease in claims in the next 12 months. 

Insurers continue to take a cautious stance to practices that advise on tax avoidance or mitigation schemes (or even refer to other firms who do) because of the prevalence of claims in this regulatory ‘grey area’ as well as the ethical questions that arise from their operation.

Impact on professional indemnity (PI) insurers 

The professional indemnity market was already hardening when the pandemic began and the market for accountants’ PI has continued to harden. Capacity has reduced, insurers’ appetites have narrowed and rates are increasing. While there are some signs new capacity may be starting to filter back in, many accountants’ practices will be facing a premium and excess increases at renewal. 

So, it’s more important than ever to work with a broker that understands your business and has a good grasp of the market for accountants’ professional indemnity, so you can partner with an insurer who isn’t likely to change tack in the next few years.

Top tips for accountants

While every practice is different we have put together some general points that will help you achieve the optimum outcome for your professional indemnity placement: 

• Take care of the simple things; claims often arise out of procedural issues rather than lack of professional competence. If you’re missing deadlines for instance, consider updating or replacing your diary management system.  
• Homeworking: A dispersed team presents specific challenges for professionals – from the supervision of juniors through to the vulnerability of online client information. Consider how you can demonstrate to insurers you’re mitigating any increase in risk.  
• Document everything from initial engagement letters to notes of meetings and telephone calls. Not only does it make your job easier, it will be easier to defend yourself in the event of a claim. 
• Keep up to date with the latest professional guidance. Much has changed recently in the wake of the pandemic and Brexit, so make sure all your employees are kept up-to-date and feel comfortable putting their hand up when they don’t know something. 
• Get renewal ready: start the renewal process early and provide as much detail as you can to insurers, especially about your claims experience and detail what measures you’ve taken to prevent the types of claims you’ve experienced in the past from happening again in future. 

If you require any assistance in the placement of your accountants’ professional indemnity insurance, please do not hesitate to contact us.

T: 0330 128 9828
E: info@championpi.co.uk

(1)  https://www.icaew.com/regulation/professional-indemnity-insurance