Top 5 claims risks facing accountants in 2024

Lack of Paperwork

When we were looking at the top 5 risks for accountancy firms, lack of “paperwork” seemed such a self-evident heading that we felt perhaps it was one which wouldn’t need to be discussed. Yet unfortunately it is something which catches out the biggest and the best at times. It is obvious but we thought it a good time to remind everyone.

You could be the world’s best accountant (or lawyer or surveyor or anyone giving advice) and provide advice to your client which is cutting edge, giving them the best possible outcome for whatever it is they wish to do. You can also have a great relationship with your client and feel there will never be any issues which couldn’t be resolved amicably. However, it is amazing how frequently that great relationship fails to exist when the loss of money is involved. It is probably why the old adage “never mix business with pleasure” exists.

Solicitors acting for Insurers have a computer full of cases where lack of “paperwork” has caused them to have to settle out a matter rather than defending it.   In one recent case, an accountancy firm was approached to advice on arranging a certain transaction. The accountant in fact advised the client of a slightly different transaction which would result in the same outcome but would minimise the tax liabilities involved. Their client was very happy. However, before the transaction was completed, the tax rules changed, and the proposed plan would not work if it wasn’t enacted prior to the tax change deadline. Unfortunately, the transaction completed after the tax change. When the resultant claim was made by the client, the accountancy firm was exposed to the loss because they could not provide correspondence which they had sent to their client clearly setting out their advice. In addition, they did not have a written summary of the advice they had given. The firm’s electronic file also contained very little helpful material. The firm advised that the advice was given at regular meetings, but unfortunately there were no contemporaneous notes of those meetings and the client denied that they had ever been advised on the outcome if the tax rules changed.  Without documentary evidence of the advice given, in court the defence would need to rely solely on the witness evidence of the accountant involved.  Giving evidence in court is not always easy and to rely totally on a witness statement would be a very risky defence tactic.  The court would invariably find in favour of the client who denied receiving the correct advice. In this instance the case was settled at £400,000 inclusive of solicitors’ costs.

So, an obvious reminder but whenever giving advice to a client, remember to always put that advice in writing. That can be either a file note of a meeting with the relevant details noted or, better still, a letter or email to the client, setting out what was discussed in full.  Even a WhatsApp can be used – although perhaps not the best format for anything of significance. In addition, save that file note, letter, email or WhatsApp etc. to the client file, which will probably be electronic so reference it to make it easy to find. Then if things do go wrong, it is simple to find the advice given and hopefully avoid costly searches of correspondence or a costly claims settlement.

Rogue Employees

We talk of a rogue employee, but what does that mean?  The dictionary definition of rogue is a “dishonest or unprincipled person”. There are plenty of claims in the professional indemnity market where a person (or persons) has managed to steal either their firm’s money or client money. Theft of client funds falls to be dealt with under a professional indemnity policy (subject to its terms and conditions). The Howden accountants wording will also cover a firm’s own loss arising out of a dishonest, fraudulent or malicious act. In general a loss of this nature is possible because the firm’s systems are not sufficiently watertight to prevent it. Everyone trusts the employee who has been with the firm for years, looking after their finances or dealing with certain aspects of the firm’s accounts. Insurers will want to see at least dual controls so that one person cannot put through a transaction solely on their own. It's fine to have different levels of expenditure which require different levels of sign-off, if that works for your firm, but there should also be frequent checks to ensure the books all balance and the expenditure can be traced back to a legitimate transaction.  It is rarely the new employee who is dishonest; in general it is someone who is embedded in the firm and trusted.

On the dishonest front we can also consider the disgruntled employee. A very good example of this was heard in Various Claimants v. WM Morrison Supermarkets [2020] UKSC 12, where Mr. Skelton, a disgruntled former employee, posted colleagues’ payroll information online.  Whilst Morrison was eventually found not liable for the serious and intentional data breach by its former employee, that does not mean that an employer will not be found liable for such losses if a court determines the employee acted in the course of his employment.

Rogue employee doesn’t always mean someone who is dishonest however, or not in the everyday use of the word. Sometimes someone can “go rogue” because they want to do more and be efficient to get the job done. The employee who is keen to be successful and do well for the firm. So in certain circumstances all the things an employer likes to see in an employee: ambition, creativity and efficiency, can also give rise to a lack of wanting to follow the rules and work processes are amended or shortened to achieve goals faster. This is known as “work friction”; almost everyone will have felt frustrated by it at some point in their working life where they perceive unnecessary steps have made the work take longer than it should have done. If the shortcut makes no difference to the outcome, then perhaps the firm can adopt that change. More than likely those systems are in place for a reason however and every now and then, if not followed, they can give rise to a loss. Again systems need to be watertight; a person should not be allowed to move onto the next part in the workflow before the one before is completed.  However, client needs change and the original workflow may become unsuitable as time passes and the world moves on, resulting in employees having to cut corners to get the right result.  Systems need to be revisited regularly.  Insurers like to hear about set procedures within the workplace, for example know your client checks including sanctions checks are undertaken before any client is actually on-boarded and any unusual or “tricky” potential clients have been assessed and approved, for example by a panel, before being accepted as a client.  Insurers would also be comforted knowing employees cannot deviate from such set procedures.

A third type of rogue employee is the one who doesn’t want to shortcut the system but actually never wants to adopt the system at all. They are set in their ways and carry on doing things as they have always done, avoiding the systems all together. The long term, probably senior employee that a firm just leaves to get on with things as they have always been so good at what they do.  This employee can be just as dangerous as the above. They have the space and ability to “go rogue” and “dabble”. Insurers have experience of “dabblers” costing them in the millions; the tax advice that the advisor wasn’t totally au fit with or the audit of a specific type of company requiring special treatment of which the auditor had no prior experience. If a system is in place, it must be in place for everyone from the most senior person down.

As mentioned under the hybrid working title, we also have the rogue employee who in reality is just overwhelmed by the work situation. They feel unable to cope and fall behind. In a bid to catch up they act alone, perhaps falsifying documents and telling the client what they want to hear in a bid to cover up the work mess they have managed to find themselves in.

Mental Health

A study by caba (the wellbeing charity for ICAEW members) in 2022 found that 56% of accountants surveyed were suffering from stress. This was compared with 41% of employees across other sectors and professions. There are undoubtedly a range of reasons for this including having to work to very tight deadlines. Studying for accountancy exams whilst working long hours can also make balancing priorities difficult. Stress and poor mental health can take a huge personal toll. Beyond that it can also create a significant business risk. The simple fact is that colleagues who are suffering with poor mental health are more likely to make mistakes. They may not spot problems or rush work because of high stress levels. Their work is also more likely to be less well documented with attendance notes, etc missing from files. Furthermore, there is a greater risk that they might not come forward if they do become aware of problems with their work.

It is therefore vital to take steps to try to provide a working environment that does not create excessive stress levels. Engaging with staff to ensure that they are properly supported in their roles is key. Having designated mental health first aiders is one tool that can be used to support people in the team. Creating an environment where colleagues feel comfortable sharing their concerns is also extremely important.

Navigating Skills Shortages

This is a common theme across a variety of different professions. Pressures to increase billing may lead to colleagues taking on new areas of work without the appropriate level of expertise. A desire to help an existing client with a new area of business may also drive some to take work on that they simply aren’t qualified to do.

There may also be times when the practice simply doesn’t have the resource to actually carry out all of the work required. One example of an area where we might start to see some issues cropping up is in the audit space. In the current environment we may start to see more firms taking on audit work. Not only may they lack the expertise to carry out the work effectively, they may lack the resource to actually do the work in the first place.

It is essential for a firm to have a protocol in place to review any potential new areas of work and to analyse the risks involved. Failure to do so can lead to mistakes and time consuming and expensive professional indemnity claims. It is worth noting that any firm that does look at engaging in new areas of work such consult their insurers and make them aware of their intentions. Taking the example of audit work again, insurers could well indicate that they will need to charge a higher premium because of the risks associated with this type of work. They may even suggest that the firm buys a higher level of cover. The insurer will want to be satisfied that their exposure to claims hasn’t risen significantly.