What do Professional Indemnity Insurers look for when providing cover for accountancy as a profession?

Accountancy firms differ greatly both in their size and the services that they offer. They vary from small, sole practitioners right through to huge international practices. Accountancy is one of the more established occupations where professional indemnity insurance is concerned. However, it is a fairly diverse profession, being made up of members from a variety of professional bodies as well as unqualified but highly experienced advisors, such as former tax inspectors.. Some of the professional bodies maintain rules for mandatory professional indemnity insurance cover. 

So what do insurers look for? 

First and Foremost - Qualifications or Experience

Professional indemnity insurers will want to see a Curriculum Vitae if an 'accountant' is unqualified. They will usually look for at least five years' practical experience, maybe more depending on the services offered.

Type of Work Undertaken by the Accountant

Insurers will pay particular attention to the type of work that the proposer is undertaking and the proposal form will bring this out by asking for a breakdown of fee income for each service offered.

Examples of the underwriters approach are:

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• Audit, Accountancy and Company Tax for Quoted Companies
  High hazard. Particularly for financial institutions. The requirements for reporting are greater and in the public eye. The size and scope of potential claimants is huge and losses can be massive.

• Other Audit and Accountancy (including related tax work)
  Standard hazard.

• Personal Taxation
  Standard hazard. Can become complex in certain specialist areas, such as members of Lloyds of London, professional sportspeople and those working in the entertainment industry, etc.

• Corporate Taxation
  Variable hazard depending upon the nature of work undertaken.

• Management Consultancy
  At strategic level this can be very low hazard. However, at the level of interim management or IT consultancy the hazard can be rated as more significant.

• Insolvencies, Liquidations and Receiverships
  Very high hazard. Because the client is in trouble and owes other people money every job taken on is a problem. The creditors can be aggressive in chasing payment and questions are frequently asked.

• General Insurance Commissions
  Generally low hazard as most accountants don’t get involved with insurance broking to any significant extent.

• Commissions from Investment Business regulated under Financial Services Act.
  Variable hazard. If accountants act as introducers only, the risk is low but where financial advice is given significant losses can arise.

• Mergers, Acquisitions and Disposals
  High hazard. The amounts of money involved can be high. Claimants can be professional with big budgets. Deals can go wrong, particularly when a business has hidden liabilities. Due diligence is an area of notable hazard.

Business conducted overseas for any of these activities can be a particular issue, especially for larger firms. Many accountancy firms remain as partnerships.

Previous Practices (if Applicable)

With much consolidation in the accountancy profession recently there are many people with a requirement to cover liability arising from their former practices. This needs to be dealt with cautiously, not just from the perspective of getting the right cover in place (due to the 'claims made' basis of professional indemnity insurance policies) but the former practices' claims record will need to be taken into consideration as well.

And finally there is the claims record

Accountants' Professional Indemnity claims records vary significantly. Many small firms are totally free of claims whilst most larger firms have encountered at least some claims and there are a number of serial offenders with awful claims experiences.

Examples of Accountants Professional Indemnity Claims

To indicate where areas of risk might exist within accountancy firms some typical areas where claims have been made against accountants are shown below.

• Personal Taxation
  Accountants failure to lodge tax returns led to a client losing their tax repayment and interest. 

• Personal Taxation/Pensions
  An accountant gives incorrect advice with regard to pension payments and alleged concealment of commissions.

• Accountancy
  Lender sought an accountants reference for a business's mortgage loan. The business failed and the subsequent sale of the property didn’t cover the outstanding loan balance.

• Trust
  Two partners in an accountancy firm were appointed trustees to a family trust. They delegated authority for investments to a company that subsequently collapsed. They also failed to minimise the tax liability on the funds.

• Company Tax
  Accountants to a profitable company, introduced them to a consultancy firm specialising in tax mitigation. Schemes designed to mitigate tax were embarked upon that proved to be fraudulent from a tax perspective.

• Auditing
  An accountancy firm failed to spot a serious fraud due to inadequate audit procedures.

• Investment Advice
  Poor investment advice led to a trust suffering a significant loss of funds.

• Fraud
  A partner in the firm stole clients' money.

• Insolvency
  An accountants firm failed to realise the full value of assets whilst dealing with the insolvency of a business. 

To find out more about Accountants Professional Indemnity Insurance or to obtain a quotation, please call our office on 01438 723755.