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TACPA May 18, 2013Professional Liability for CPAs

This presentation can be found online at:http://www.slideshare.net/GeraldBrunker/cpa-presentation-may-18-2013

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Learning Objectives

Underwriters’ View of CPA Firms Factors to Assess Premiums Most Frequent Claims Filed Actions to Mitigate Risk of a Claim Cyber Risk and EPL Exposures PL Claims Made Coverage Basics Supplemental Payment Features Special Endorsement Coverage Options

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Current CPA PL Market

CNA/Aon/AICPA Philadelphia

Insurance Cos Lexington/NH (AIG)

(Chartis) Argonaut Ins Co CPA Mutual

Insurance Co St. Paul/Travelers Greenwich/XL National Casualty

Co/Jamison

Navigators/Landy Admiral Ins Co Hartford Ins

Company/Target Markel Ins Co GenStar/Pearl Lloyds of London CAMICO Mutual

Ins Co Arch Insurance

Group Catlin Insurance

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Professional Liability Insurance

What is it? E&O insurance provides insurance coverage

for the negligent acts, errors and omissions of the insured in performing a service

Who is a professional?• Engineers, architects, accountants, lawyers,

doctors, not just professionals, however – miscellaneous pros and Not For Profits

• E&O policies tend to be tailored to the specific profession of the insured

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Duty to Client

Standard of care: level of care that is the customary or usual practice of other members of the accounting profession

Example: failing to file a client’s tax return on time

CPA professional standards: public interest, due care and objectivity

Duty to non-clients?

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Negligence

Four key elements to a suit:CPA had a duty to the clientProve CPA breached that dutyPlaintiff must show was injuredProve breach of duty was proximate

cause of the injury (was breach sufficiently responsible so that CPA should be held accountable?)

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Underwriters’ Views on PH

Like PHs to collaborate and be a team with underwriters

Provide best and most accurate information to underwriters on area of practice and expertise

Allows underwriters to provide best pricing and areas for improvement (engagement letters, peer reviews and areas for specific CPE)

Applications and supplements (add narrative on internal controls)

Loyalty credits

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Factors to Assess Premiums

Underwriters view several variables to determine premiums:

Revenues Areas of practice Types of clients Staff Risk/quality control procedures Claims experience

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Revenues by AOP & Client Type

Most recently completed year Current year to date Projection for next fiscal year Underwriters looking for whether firm has

stable, growing or shrinking revenues Underwriters also look at revenues per staff

member as a gauge May average years to smooth out any

spikes or dips in revenues

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Areas of Practice (AOP) Some AOPs have higher exposure Audit claims have higher damage payouts Tax claims are more frequent but with

smaller damage payouts Other high exposure AOPs: handling client

funds, trustee work and consulting work, high profile clients

Expansion of management advisory services (beyond IT to HR, litigation, etc)

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Types of Clients

Some client types are high risk such as public company clients; athletes or celebrities

Some industries are higher risk with stringent accounting guidelines and procedures to be followed: banking, insurance, construction and auto dealers

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CPA Firm Staff

Size of staff Expertise of staff Revenue per staff member Continuing education Turnover of staff Length of tenure of staff Participation in Society or Association

events

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Risk Control Procedures

Use of engagement letters on all services. Updated annually?

Use of written checklists Diary system in place to track work Participation in peer review program Use of client screening process (unsavory,

financial problems, poor internal controls, lack internal stability, uncertain futures, change, sue or shop for CPAs, substantial litigation, expertise mismatch, professional intuition)

No suits to recover fees

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AICPA Suit Sources

20% Individual tax returns 6% Compilation 5% Bookkeeping 31% Corporate tax 38% Other (estate, audits, consulting,

financial planning/advisory, review, tax planning, trust engagements)

>20 years – 67% arise from taxes

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Percentage of Total Claims(By Service)

55%

13%

11%

10%

5%6%

Tax Claims 55%

Compilation &Review 13%Consulting 11%

Audit 10%

Fiduciary 5%

Other 6%

Copyright 2010

Ralph G. Picardi, Esq.

www.lappingpicardi.com

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Percentage of Total Dollar Losses(By Service)

17%

13%

8%

37%

5%20%

Tax Claims 17%

Compilation &Review 13%Consulting 8%

Audit 37%

Fiduciary 5%

Other 20%

Copyright 2010

Ralph G. Picardi, Esq.

www.lappingpicardi.com

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Percentage of Tax Claims(By Type of Client)

35%

20%

16%

13%

8%

8% Individual35%C Corp 20%

S Corp 16%

Partnership13%Trust 8%

Estate 8%

Copyright 2010

Ralph G. Picardi, Esq.

www.lappingpicardi.com

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Percentage of Audit Claims(By Source of Claim)

40%

5%10%

9%

6%

25%

5%

Failure to detect 40%

Conflict of Interest5%

InsufficientDisclosures 10%

Engagement Disputes9%

Fraud 6%

Financial StatementErrors 25%

Other 5%

Copyright 2010

Ralph G. Picardi, Esq.

www.lappingpicardi.com

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Claim Trends Since 2008

Most frequent claims are tax related and will continue as tax laws change

Uptick in embezzlement claims with state of economy – CPA staff stealing from firm’s clients

Firm does tax work with no engagement letter – dragged in as a “deep pocket”

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Claim Examples

$170,000 -An accountant made a $1.9 million error in a client’s financial statements. Client filed claim for cost of another accounting firm to correct the mistake.

$205,000 -The heirs of a wealthy investor brought suit against their accountant for not filing a timely tax return resulting in penalties and interest charged to the estate.

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Claim Examples

$185,000 -An accountant audited the financial statements of a client. Failed to detect and recognize irregularities associated with an employee embezzlement.

$375,000 -An accountant set up a client’s investment properties as a corporation instead of a partnership. Client alleged losses for tax liability that must be paid by the client.

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Major Settlements

2007 PWC $225 million to settle investor class action suit at Tyco

2005 KPMG $22 million SEC settlement over Xerox audits

2005 D&T $50 million to settle US regulators claims over Adelphia

1999 E&Y $335 million to Cendant shareholder settlement

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Actions to Mitigate Claims

Documentation Client Management Areas of Practice Fiduciary Liability Technology Form of practice (PCs, LLCs, LLPs) Personal asset protection

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Documentation

Document, document, document Engagement letters – ALL services –

specify work doing and NOT doing Avoid “drift” – additional services w/o Include ADR/mediation clause Include limitation of liability clause Use checklists and diary system Establish record retention policy Keep current on time and billing Quality control document for tax work

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Client Management

NEVER SUE FOR FEES Know reasonable fees (trusts, elderly

or unsophisticated) Do not create conflicts of interests (no

investing, loans or borrowing – maintain independence)

Screen new clients. Background checks. Use risk management committee. Call PL hotline.

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Client Management

Know clients, screen clients and disengage from difficult clients (get help from underwriters if necessary)

Know your expertise and time constraints – do not take more than you can handle

Manage client expectations at outset and during engagement

Do not make unattainable promises Do not predict or guarantee outcomes Communicate progress regularly

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Area of Practice

Make sure you have expertise Do not move out of comfort zone Be aware of outside experts such as

tax lawyers with new schemes Be cautious of new areas of practice –

SEC attest work for financial firms. Investment funds, mortgage bankers or brokers or real estate related clients

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Fiduciary Liability

Trustee work problematic when family dysfunctional. Trust agreement with indemnification of trustee for liability claims funded with trustee liability insurance

Access to client funds – careful supervision of your employees. Dishonesty bond with third party extension for client funds

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Technology 2010 – Chinese Hackers Target Law Firms

to Get Secret Deal Data – (Potash-BHP Billiton Ltd) – if law firms vulnerable – CPA firms?

Strong data protection procedures Reinforce with encryption and firewall Client electronic records on site only Consider an outside technology audit Consider cyber liability insurance (rather

than endorsements on PL or BOP)

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Cyber Risk and EPL

The frequency of online attacks against U.S. businesses continues to increase, along with the cost of defending against those attacks and mitigating any resulting data breaches

According to the 2012-2013 Edition of Jury Award Trends and Statistics, the national median award for employment practice claims in 2011 was $325,000, up from $172,500 in 2010

Separate limits from PL and specialized services for cyber and EPL risks

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PL Claims Made Coverage Basics

Claim made during policy period.

Claim or circumstance reported during policy period (or if ERP activated).

Negligent act happened after prior acts or retroactive date.

Good faith statement no knowledge of negligent act on inception date of policy.

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Accounting Professional Liability Insurance

Covers claims from rendering or failing to render professional accounting services.

Claims made trigger. Prior acts coverage. Defense and payments to third

parties. Endorsements and exclusions. Limits/deductibles and cost. Contractual liability (vicarious liability

of consultants). Extended Reporting Periods (Tail). Hammer clauses

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Basic or Broad Coverage

Simple application Basic coverage for accountants,

bookkeepers and tax preparers Tax engagements, planning Bookkeeping Reviews Compilations Independent contractors Notary public

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Broad Coverage More detailed application Higher limits and deductible options Coverage for reviews and audits SEC acts/security related activities Computer hardware/software sales Investment advice, management

advisory and financial advising More ERP options (1,3,5 years) Free Death or Disability ERPs

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Supplemental Payment Features

Defense Costs Outside Limits Loss of Earnings (per day/aggregate) Regulatory or Governmental Actions,

Disciplinary Proceedings (aggregate per policy year)

Subpoena Response Assistance (legal representation)

Pre-Claims Assistance (reporting of events; legal representation; subsequent claims covered)

Mediation Deductible Credits

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Special Endorsement Coverage Options

Electronic media exposure including social media

Cyber liability and identity theft Sarbanes Oxley Gramm Leach Bliley Life insurance sales Services as a registered rep Employment practices liability (defense

only) Non-Profit D&O (low limits)

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Summary

Questions?

Underwriters’ views on CPA firms, factors to assess premiums, claims and actions to mitigate risk of a claim

Improve your CPA Practice and Services to Your Clients

Coverage Checklists on Professional, EPL and Cyber Risk

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RISKPRO Insurance Agency, LLCGerald P Brunker, CPCU, ARMPrincipal/Owner

Facebook: Gerald Brunker & RISKPRO Insurance Agency, LLC

Twitter: RISKPROInsAgy LinkedIn: Gerald Brunker Blog: www.riskpro.us/blog Email: brunker@riskpro.us

This presentation can be found online at:http://www.slideshare.net/GeraldBrunker/cpa-presentation-may-18-2013