Mandatory insurance may boost SME trust in small audit firms

Small and medium enterprises (SME) in Singapore may become more willing to hire sole proprietors and partnership-run accounting firms once proposed rules making professional indemnity insurance mandatory take effect, analysts said.

“This reform is a positive step towards increasing SMEs’ trust in hiring freelance or small-firm accountants,” Karen Yeo, head of financial lines at Howden Singapore Pte. Ltd., told Singapore Business Review. “Given that accounting firms are regulated by the same professional standards, SMEs would have greater confidence in engaging smaller firms.”

Given that accounting firms are regulated by the same professional standards, SMEs would have greater confidence in engaging smaller firms.

The Accounting and Corporate Regulatory Authority (ACRA) said 408 accounting firms operating as sole proprietorships or partnerships would be affected. At present, only accounting corporations and limited liability partnerships (LLP) must have professional indemnity coverage, which protects firms against claims arising from negligence or errors.

A public consultation on the proposed changes closed on 31 July, but no implementation date has been announced. Once effective, firms will have six months to comply. Minimum coverage starts at $1m, rising with the size and revenue of the firm up to $50m.

“ACRA will conduct compliance checks to ascertain whether the accounting entities comply with the professional indemnity insurance requirements,” the agency said in an emailed statement. “If noncompliance is found, disciplinary action may be taken against the public accountant and/or the accounting entity.”

Industry bodies say the requirement could benefit both clients and practitioners.

Terence Lam, director of advocacy and professional standards at the Institute of Singapore Chartered Accountants (ISCA), said sole proprietorships and partnerships face unique risks since they are subject to unlimited personal liability.

“Unlike public accounting corporations and LLPs, they are subject to unlimited personal liability, meaning their personal assets could be at risk in the event of a claim,” he said in an emailed reply to questions. “Requiring professional indemnity insurance helps ensure that clients are not left without recourse, and practitioners are not left personally vulnerable.”

Lam added that the process of securing the insurance encourages firms to better understand exposures such as data protection and cybersecurity.

Yeo noted that insurance policies cover not only damages awarded by the courts but also defence costs, which can be substantial in Singapore.

She cited the case of a Howden client who acted as liquidators and faced a third-party claim exceeding $500,000 for alleged misuse of rental income and breaches of duty. Howden arranged the professional indemnity policy that provided for the legal defence and continued support when the case was reopened, before the firm eventually succeeded in having the claim dismissed.

In another case, Yeo said a small firm faced a $600,000 lawsuit from two investors over alleged mismanagement. The dispute was settled, with the policy covering more than $500,000.

“Legal expenses can be costly in Singapore, and having professional indemnity insurance is a cost-effective way to transfer such risks to the insurance market while protecting the individuals’ personal assets,” she said. “SMEs would have greater assurance that in the event of claims, there would be a right of recourse.”

Yeo warned that a major claim could otherwise sink a small practice, leaving clients unable to recover losses.

This article was first published on Singapore Business Review.