Accountants Claims – Predicting the Future

Claims made against accountants during the last recession and even over the last decade have often escaped the more excessive claim trends that have been suffered by other traditional professions such as the law, with accountants on the whole avoiding the rush of PI claims. But how easy is it to predict claim trends for the future?

We've looked into the crystal ball and predict the outcomes that we will discuss below. We can predict these outcomes by looking at the type of claims we are seeing today, the political and economic climate and the different types of accountancy firm.

What types of claims are most common right now?

The type of claims which insurers are handling at the moment can give us an instant picture of present market trends and a wider view of the market taken as a whole. This can be extrapolated to give us a guide that will take us to the end of the year.

Current claims can be roughly grouped into three areas which are the result of work which was carried out around the time of the last recession. These are:

1. Tax work and transactional work that was based before the recession, such as film finance schemes and transactions which caused losses during the crash in 2008.
2. Claims against insolvency firms.
3. An increase of claims from certain types of tax planning due to HMRC’s aggressive campaign against tax avoidance.

What’s next for claims?

Claim trends can be driven by the economic and political environment of the time. During a recession the number of PI claims are generally expected to rise, and while accountants seem to be less affected that other professional groups, even they are not exempt from claims.

If we assume that the economy of the UK will continue on an upward trajectory for the next 2/3 years, then this may result in the claims environment becoming less turbulent but broader, as top firms (especially those in the top 100) increase their practices by expanding across growing sectors, including overseas.

We may also see a reduction in claims (both real and speculative) due to failed businesses, assuming that the number of “zombie” companies continues to drop. Liquidators often make claims of this type against accountants and they may come about because of corporate finance deals, lax audits and tax advice.

However, there are some types of claims that may not follow the trend. These are:

1. Probate claims.

   Now that the ICAEW has the power to regulate probate, and also to licence alternative business structures, the door is open for accountants to start taking on probate work. But be wary - this type of work could lead to a high number of claims of professional negligence - estimates suggest that up to 15% of claims against solicitors are because of probate work. And this is backed up by the Legal Ombudsman - according to their website around 13% of complaints they received in 2013/2014 related to probate. So we can expect to see an increase in these types of claims.

   Probate work covers a number of areas from will drafting and estate management to handling client monies. Since professional negligence complaints and claims can arise from any of these areas, expertise in the field is vital.

   While probate work represents a new and exciting opportunity for many accountants, the firm must make sure that it has the right expertise to manage the work and to make sure that all required procedures are followed correctly. Currently accountants are required to complete a two day course before they can offer probate services, but this may not be sufficient and firms should be aware that errors can lead to potential claims. It may be worth considering hiring experienced probate teams (e.g. from law firms) to assist with probate work if there are any concerns that the firm may be liable to claims.

2. Tax avoidance schemes.

   Insurers are concerned about this, and so they should be. In the near future claims against aggressive tax advisers are likely to increase sharply. This is driven by government policy that is committed to recovering a huge amount of outstanding tax, and also to HMRC aggressively closing down tax avoidance schemes.

   Firms with tax teams will not become uninsurable. Underwriters are aware that accountant give tax advice but now they are carefully examining the type of tax work that firms engage in, and firms which specialise in aggressive schemes that are designed to avoid tax should be cautious.

Economic climate – can we be optimistic?

Given the current economic climate, we are unlikely to see the increase in claims that happened after the recession in the 1990s. That was an uncertain time for insurers with Merrett pulling out of the market and a jump in audit claims and transactional related claims. However, since then accountants have improved in the area of risk management, for example with tighter retainer letters, and firms are aware that they must take care to limit the scope of their duty and any potential liability. And recent legal actions have contributed towards ending claims against auditors, especially those made by third parties.

However, caution is always advised when discussing the economy. While the UK economy may be rebounding other Western economies are still struggling. Ongoing wars in the Middle East and other countries as well as fluctuating oil prices all add up to global uncertainty. The British economy is not invulnerable to global turbulence.

Type of firm – does it matter?

Given the size of the market at the moment - from the huge multinational accounting firms involved in a range of different areas down to the thousands of small high street companies working in areas such as personal tax advice and general book keeping – we would expect to see different types of claims across the accountants’ market.

So at the smaller end we expect a stable environment with the types of general accounting and standard tax claims you would normally expect from smaller practices. For the top 100 firms, claims will most likely be drawn from a wider range of sources, including internationally.

In line with normal trends we would expect to see something like 30% of claims coming from tax advice, and after that from audit, transactional, insolvency and general accounting. Since all accountants undertake tax work we would not expect to be worried about claims from tax advice. However it is worth watching out for claims concerning firms with specialist and/or aggressive tax avoidance teams. Multi-disciplinary firms with inexperienced legal teams, such as smaller firms with a history of poor risk management, may also be a factor.

In summary

So in summary, using the key indicators above, we would expect to see the following over the next three years (providing the economy continues to perform as expected):

1. A stable claims environment on the whole, with the majority of claims (around 30%) related to tax, followed in order by transactional/advisory claims, audit claims, insolvency claims and general accounting claims.
2. A short term jump in claims due to aggressive tax avoidance schemes.
3. A more varied and possibly broader range of claims created by the top 100 firms and coming from an array of growth areas including internationally; and multi-disciplinary firms with integrated legal teams.