Accounting Today - July 2011

those from the 1990s to newer claims. “In
every case where a CPA calls up and says, ‘ We
have a problem,’ we open a file. In the cases
prior to 1998, we only paid out on 32 percent.
Since 1999 we have paid on 49 percent, so
now on almost half of all our liability cases we
actually end up making payments.”
Due to the financial scandals of the past
20 years, CPAs are squarely in the crosshairs
of plaintiffs’ attorneys, Thompson observed.
“They’re the last men standing — and they
carry insurance, which, to the attorneys,
equals deep pockets,” he said.

Ron Parisi, executive vice president of risk
management at professional liability insurer
Camico, said that accounting firms haven’t
increased their liability policy limits to match
their increase in revenue over the last five to
seven years. “The sophistication of account-
ing practices has increased, as they have tak-
en on bigger clients with larger exposures,”
he said. “This is partly due to extending into
niche practices, and partly due to the cascad-
ing of larger clients down the chain.”
Parisi recommended that firms evaluate
their policy limits so that they match both the
firms’ revenue and the composition of prac-
tice. “They should calculate their limits based
on the complexity of services they offer, and
the size of their clients,” he said.

Parisi cautioned small and midsized firms against giving tax advice in areas they’re not expert in: “Federal and state authorities are being very aggressive, and we’ve seen an increase in claims related to tax services both in preparation and advice.”

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BAD ECONOMY = MORE CLAIMS

The merging of smaller firms into larger firms
is also causing higher-than-average claims
activity, Parisi said. “The smaller firm may not
have the same level of risk management that
the larger firm performs, and there is often
a lack of attention to individual client issues
during the merger period,” he said. “Basically,
the individual partners may not have been
minding the shop during the transition per-
iod as well as they could.”
A reduction in staff as revenues slid during
This pool is also in flux, with joint ventures
cropping up so organizations can present
themselves “strategically as a better value to
the government,” said Kessler. While she of-
ten encounters these unions between small
and large organizations, she explained that,
“It takes different shapes and forms.”
Firms looking to make their own part-

the economic downturn has caused firms to
do more work with less staff, explained Dan
Reed, second vice president of professional
services at Travelers Insurance. “This causes
some potential stretching of resources, which
can lead to increased liability exposure.”
“At the same time,” he added, “many of their
clients are experiencing their own economic
downturn, and are less forgiving of mistakes.
They’re more willing to pursue a professional
liability claim to recoup any loss.”
Failure to detect fraud is a growing issue,
Reed said. “Normally, an obligation to de-
tect fraud is not a part of the traditional audit
service, but we’re seeing more claims in this
area,” he said. “The problem is that so often an
accountant has not used an engagement let-
ter to spell out the scope of the audit. If there’s
no engagement letter, the client has an argu-
ment that he reasonably believed fraud de-
tection was part of the audit engagement.”
Accountants’ claims to collect unpaid fees
often generate a malpractice counterclaim,
Reed observed. “This is especially prevalent
as a result of the poor economy,” he said. “The
accountant gets behind in billing, and the
counterclaim complains about the quality of
the work that was performed.”
Reed offered several examples of malprac-
tice cases generated, at least in part, by the
economy. “In one case, an accountant had
a busy tax practice, but did not have time to
do engagement letters for every client,” he
said. “He thought he had an understanding
that his practice was limited to tax services.
The office manager of one of his clients em-
bezzled a substantial amount, and the client
then turned and brought a claim against the
accountant alleging that the accountant was
responsible for failing to detect the embezzle-
ment. The CPA said he was only engaged to
do tax work, but the client said he was also re-
sponsible to audit the books and detect fraud.
Because there was no engagement letter, it
became a swearing match, and resulted in a
substantial settlement.”
In another situation, an accountant was
forced to lay off experienced staff because of
falling revenue. “However, to meet the de-
mands of tax season, he hired an inexperi-
enced relative,” recalled Reed. “One of their
clients experienced a tax loss because of an
nerships with government entities will face
the challenge of procurement, according to
Zarny, who suggested locating opportunities
through events. “Government organizations
have various education sessions, nonprofit
groups run education sessions and network-
ing events, and agencies have vendor days, as
prime contractors are frequently looking for
smaller businesses to team with,” he said.

INTERNAL THEFT, CYBER THREATS

“There’s been an increase in client employ-
ees committing thefts,” agreed Greg Lessard,
vice president of professional services at
The Hartford. “For the most part, account-
ing firms are doing a good job of identifying
those situations and bringing it to the own-
ers’ attention.”
Lessard also cited the growing prevalence
of cyber liability exposure as a major issue.
“Almost anyone who has client data has an
exposure. The issue is how will they deal with
it — do they make use of encryption, and the
most up-to-date anti-virus software? Do
they train their employees to avoid ‘phish-
ing’ schemes?”
Most professional liability policies now
are not explicit about cyber liability, accord-
ing to Lessard. “We’re currently drafting an
endorsement that will provide some limited
coverage for no additional charge,” he said.

Electronic files include not only work pap-
ers, but also e-mails, text messages, instant
messages, blogs and any other message
stored electronically, cautioned Thompson.
“Remember, it’s all discoverable — even in-
formation stored on personal home comput-
ers and phones used for business,” he said.
“And people write differently than they speak.
Andersen wasn’t found guilty of performing a
bad audit — it was found guilty of a cover-up
based upon one bad e-mail.”
“At our practice, we do our best to make
sure there are no errors or consequences due
to unintentional mistakes,” said Cliffwood,
N.J.-based practitioner Salim Omar. “This
helps minimize the exposure in the event
that something happens.”
Omar recommends making sure that
coverage matches risk exposure. “It doesn’t
increase your premiums by much to get ad-
ditional coverage. Look at it as a cost of doing
business,” he said.

“I’ve never been sued, but it only takes once to devastate your practice,” he said. AT ment organizations have small-business requirements where a percentage of every procurement needs to go to a smaller business or minority businesses,” Zarny explained.