Top 5 claim trends affecting accountants in 2023
As one of the leading insurance brokers for accountants professional indemnity and cyber insurance Howden has a wealth of information on claims trends. In this article we utilise what we have seen across 2022 and are already seeing in 2023 to take a look at five of the key areas of risk that are impacting accountants:
- Audit – This remains top of the charts in terms of risks for accountants as the potential for significant claims remains high. Likewise the costs of regulatory investigations into audit work can be eye watering. For an audit firm the time costs of dealing with such an investigation can be painful. It is worth noting that insurers feel this area of claims is likely to increase if the UK falls into recession and more businesses begin to fail. There have been a few cases where there has been a clean audit signed off and a few weeks/months later the business has failed. Auditors must ensure that they have rigorous processes in place and adhere to audit regulations. The shift to ISQM standards in December 2022 means that a much more proactive approach to quality management is required. Avoiding conflicts of interest and exercising a high degree of professional scepticism in the audit process are key. Insurers continue to look closely at whether challenger firms have the appropriate skills and are sufficiently robust in their approach to audit work.
- Tax advice – This is a common source of claims for accountants. Claims arising out of advice on CGT, Entrepreneurs Relief and EIS schemes remain commonplace. Accountants should take care to only advise on subjects they are familiar with and seek specialist input as and when required. They should also set out the scope of their engagement (including limitations of liability) clearly in order to minimise the risk of successful claims.
- Insolvency – This is a challenging area of business. Disgruntled business owners and creditors frequently challenge insolvency practitioners. Even if any allegations are without merit they can be time consuming and costly to rebut and in the current economic climate it can be expected that there will be an increase in claims in this area. Again, if we do enter a period of recession this will only escalate so underwriters will be watching this area closely.
- Business purchase/disposal – This is often a contentious area. Claims can arise from a variety of sources, there can be concerns raised around the accuracy of the accounts of the business in question or sometimes disputes arise over what should have actually been included in the sale. Advice on the tax implications on the sale or purchase of a business is another source of potential claims. If a client receives an unexpected tax bill they may well seek to blame their accountant. In addition, disputes also often arise between business owners (particularly family businesses where there may be a number of wealthy individuals involved) at the point of sale and accountants can easily be drawn in. It is therefore extremely important to manage any business sale or disposal carefully and address any potential conflicts of interest.
- Financial services work- This is an area where insurers apply particularly high premium rates. Claims in relation to financial services work are commonplace and can sometimes be high value. The potential for high frequency and high severity events is a red flag for insurers. There is also the potential for complaints to be made to the FOS and they have much greater latitude in finding for claimants. The recent announcement regarding the increase in the award cap to £415,0001, together with plans to review the thresholds for eligibility to complain will set further alarm bells ringing. Finally, S166 or ‘Skilled Person Reviews’2 also concern insurers. As you will be aware, this is where a particular issue or business area is reviewed. They can be extremely time consuming and expensive for a business to deal with. The potential for consumer redress schemes will always trouble insurers and the current issues around British Steel Defined Benefit Transfers highlight this.
Having clearly defined risk management strategies will undoubtedly help to limit exposure to claims. This is particularly important as we move into a world of hybrid working where ensuring that policies and procedures are followed will be ever more challenging. If you would like to discuss your insurance or risk management needs please do not hesitate to contact the team at Howden.