Slides from May 18th presentation before the Texas Association of Certified Public Accountants (TACPA) regarding professional liability coverage.

1. 05/22/13RISKPRO1
TACPA May 18, 2013
Professional Liability for CPAs
This presentation can be found online at:
http://www.slideshare.net/GeraldBrunker/cpa-presentation-may-18-2013

2. 05/22/13RISKPRO2
Learning Objectives
 Underwriters’ View of CPA Firms
 Factors to Assess Premiums
 Most Frequent Claims Filed
 Actions to Mitigate Risk of a Claim
 Cyber Risk and EPL Exposures
 PL Claims Made Coverage Basics
 Supplemental Payment Features
 Special Endorsement Coverage Options

3. 05/22/13RISKPRO3
Current CPA PL Market
 CNA/Aon/AICPA
 Philadelphia
Insurance Cos
 Lexington/NH (AIG)
(Chartis)
 Argonaut Ins Co
 CPA Mutual
Insurance Co
 St. Paul/Travelers
 Greenwich/XL
 National Casualty
Co/Jamison
 Navigators/Landy
 Admiral Ins Co
 Hartford Ins
Company/Target
 Markel Ins Co
 GenStar/Pearl
 Lloyds of London
 CAMICO Mutual
Ins Co
 Arch Insurance
Group
 Catlin Insurance

4. 05/22/13RISKPRO4
Professional Liability Insurance
 What is it?
 E&O insurance provides insurance coverage
for the negligent acts, errors and omissions
of the insured in performing a service
 Who is a professional?
• Engineers, architects, accountants, lawyers,
doctors, not just professionals, however –
miscellaneous pros and Not For Profits
• E&O policies tend to be tailored to the
specific profession of the insured

5. 05/22/13RISKPRO5
Duty to Client
 Standard of care: level of care that is
the customary or usual practice of
other members of the accounting
profession
 Example: failing to file a client’s tax
return on time
 CPA professional standards: public
interest, due care and objectivity
 Duty to non-clients?

6. 05/22/13RISKPRO6
Negligence
 Four key elements to a suit:
CPA had a duty to the client
Prove CPA breached that duty
Plaintiff must show was injured
Prove breach of duty was proximate
cause of the injury (was breach
sufficiently responsible so that CPA
should be held accountable?)

7. 05/22/13RISKPRO7
Underwriters’ Views on PH
 Like PHs to collaborate and be a team
with underwriters
 Provide best and most accurate
information to underwriters on area of
practice and expertise
 Allows underwriters to provide best
pricing and areas for improvement
(engagement letters, peer reviews and
areas for specific CPE)
 Applications and supplements (add
narrative on internal controls)
 Loyalty credits

8. 05/22/13RISKPRO8
Factors to Assess Premiums
 Underwriters view several variables to
determine premiums:
 Revenues
 Areas of practice
 Types of clients
 Staff
 Risk/quality control procedures
 Claims experience

9. 05/22/13RISKPRO9
Revenues by AOP & Client Type
 Most recently completed year
 Current year to date
 Projection for next fiscal year
 Underwriters looking for whether firm has
stable, growing or shrinking revenues
 Underwriters also look at revenues per staff
member as a gauge
 May average years to smooth out any
spikes or dips in revenues

10. 05/22/13RISKPRO10
Areas of Practice (AOP)
 Some AOPs have higher exposure
 Audit claims have higher damage payouts
 Tax claims are more frequent but with
smaller damage payouts
 Other high exposure AOPs: handling client
funds, trustee work and consulting work,
high profile clients
 Expansion of management advisory
services (beyond IT to HR, litigation, etc)

11. 05/22/13RISKPRO11
Types of Clients
 Some client types are high risk such
as public company clients; athletes or
celebrities
 Some industries are higher risk with
stringent accounting guidelines and
procedures to be followed: banking,
insurance, construction and auto
dealers

12. 05/22/13RISKPRO12
CPA Firm Staff
 Size of staff
 Expertise of staff
 Revenue per staff member
 Continuing education
 Turnover of staff
 Length of tenure of staff
 Participation in Society or Association
events

13. 05/22/13RISKPRO13
Risk Control Procedures
 Use of engagement letters on all services.
Updated annually?
 Use of written checklists
 Diary system in place to track work
 Participation in peer review program
 Use of client screening process (unsavory,
financial problems, poor internal controls,
lack internal stability, uncertain futures,
change, sue or shop for CPAs, substantial
litigation, expertise mismatch, professional
intuition)
 No suits to recover fees

14. 05/22/13RISKPRO14
AICPA Suit Sources
 20% Individual tax returns
 6% Compilation
 5% Bookkeeping
 31% Corporate tax
 38% Other (estate, audits, consulting,
financial planning/advisory, review, tax
planning, trust engagements)
 >20 years – 67% arise from taxes

15. 05/22/13RISKPRO15
Percentage of Total Claims
(By Service)
55%
13%
11%
10%
5%
6%
Tax Claims 55%
Compilation &
Review 13%
Consulting 11%
Audit 10%
Fiduciary 5%
Other 6%
Copyright 2010
Ralph G. Picardi, Esq.
www.lappingpicardi.com

16. 05/22/13RISKPRO16
Percentage of Total Dollar Losses
(By Service)
17%
13%
8%
37%
5%20%
Tax Claims 17%
Compilation &
Review 13%
Consulting 8%
Audit 37%
Fiduciary 5%
Other 20%
Copyright 2010
Ralph G. Picardi, Esq.
www.lappingpicardi.com

17. 05/22/13RISKPRO17
Percentage of Tax Claims
(By Type of Client)
35%
20%
16%
13%
8%
8% Individual
35%
C Corp 20%
S Corp 16%
Partnership
13%
Trust 8%
Estate 8%
Copyright 2010
Ralph G. Picardi, Esq.
www.lappingpicardi.com

18. 05/22/13RISKPRO18
Percentage of Audit Claims
(By Source of Claim)
40%
5%
10%
9%
6%
25%
5%
Failure to detect 40%
Conflict of Interest
5%
Insufficient
Disclosures 10%
Engagement Disputes
9%
Fraud 6%
Financial Statement
Errors 25%
Other 5%
Copyright 2010
Ralph G. Picardi, Esq.
www.lappingpicardi.com

19. 05/22/13RISKPRO19
Claim Trends Since 2008
 Most frequent claims are tax related
and will continue as tax laws change
 Uptick in embezzlement claims with
state of economy – CPA staff stealing
from firm’s clients
 Firm does tax work with no
engagement letter – dragged in as a
“deep pocket”

20. 05/22/13RISKPRO20
Claim Examples
 $170,000 -An accountant made a $1.9
million error in a client’s financial
statements. Client filed claim for cost of
another accounting firm to correct the
mistake.
 $205,000 -The heirs of a wealthy investor
brought suit against their accountant for not
filing a timely tax return resulting in
penalties and interest charged to the estate.

21. 05/22/13RISKPRO21
Claim Examples
 $185,000 -An accountant audited the
financial statements of a client. Failed to
detect and recognize irregularities
associated with an employee
embezzlement.
 $375,000 -An accountant set up a client’s
investment properties as a corporation
instead of a partnership. Client alleged
losses for tax liability that must be paid by
the client.

22. 05/22/13RISKPRO22
Major Settlements
 2007 PWC $225 million to settle
investor class action suit at Tyco
 2005 KPMG $22 million SEC
settlement over Xerox audits
 2005 D&T $50 million to settle US
regulators claims over Adelphia
 1999 E&Y $335 million to Cendant
shareholder settlement

23. 05/22/13RISKPRO23
Actions to Mitigate Claims
 Documentation
 Client Management
 Areas of Practice
 Fiduciary Liability
 Technology
 Form of practice (PCs, LLCs, LLPs)
 Personal asset protection

24. 05/22/13RISKPRO24
Documentation
 Document, document, document
 Engagement letters – ALL services –
specify work doing and NOT doing
 Avoid “drift” – additional services w/o
 Include ADR/mediation clause
 Include limitation of liability clause
 Use checklists and diary system
 Establish record retention policy
 Keep current on time and billing
 Quality control document for tax work

25. 05/22/13RISKPRO25
Client Management
 NEVER SUE FOR FEES
 Know reasonable fees (trusts, elderly
or unsophisticated)
 Do not create conflicts of interests (no
investing, loans or borrowing –
maintain independence)
 Screen new clients. Background
checks. Use risk management
committee. Call PL hotline.

26. 05/22/13RISKPRO26
Client Management
 Know clients, screen clients and disengage
from difficult clients (get help from
underwriters if necessary)
 Know your expertise and time constraints –
do not take more than you can handle
 Manage client expectations at outset and
during engagement
 Do not make unattainable promises
 Do not predict or guarantee outcomes
 Communicate progress regularly

27. 05/22/13RISKPRO27
Area of Practice
 Make sure you have expertise
 Do not move out of comfort zone
 Be aware of outside experts such as
tax lawyers with new schemes
 Be cautious of new areas of practice –
SEC attest work for financial firms.
Investment funds, mortgage bankers
or brokers or real estate related
clients

28. 05/22/13RISKPRO28
Fiduciary Liability
 Trustee work problematic when family
dysfunctional. Trust agreement with
indemnification of trustee for liability
claims funded with trustee liability
insurance
 Access to client funds – careful
supervision of your employees.
Dishonesty bond with third party
extension for client funds

29. 05/22/13RISKPRO29
Technology
 2010 – Chinese Hackers Target Law Firms
to Get Secret Deal Data – (Potash-BHP
Billiton Ltd) – if law firms vulnerable – CPA
firms?
 Strong data protection procedures
 Reinforce with encryption and firewall
 Client electronic records on site only
 Consider an outside technology audit
 Consider cyber liability insurance (rather
than endorsements on PL or BOP)

30. 05/22/13RISKPRO30
Cyber Risk and EPL
 The frequency of online attacks against
U.S. businesses continues to increase,
along with the cost of defending against
those attacks and mitigating any resulting
data breaches
 According to the 2012-2013 Edition of Jury
Award Trends and Statistics, the national
median award for employment practice
claims in 2011 was $325,000, up from
$172,500 in 2010
 Separate limits from PL and specialized
services for cyber and EPL risks

31. 05/22/13RISKPRO31
PL Claims Made Coverage Basics
 Claim made during policy period.
 Claim or circumstance reported during
policy period (or if ERP activated).
 Negligent act happened after prior acts or
retroactive date.
 Good faith statement no knowledge of
negligent act on inception date of policy.

32. 05/22/13RISKPRO32
Accounting Professional
Liability Insurance
 Covers claims from rendering or
failing to render professional
accounting services.
 Claims made trigger.
 Prior acts coverage.
 Defense and payments to third
parties.
 Endorsements and exclusions.
 Limits/deductibles and cost.
 Contractual liability (vicarious liability
of consultants).
 Extended Reporting Periods (Tail).
 Hammer clauses

33. 05/22/13RISKPRO33
Basic or Broad Coverage
 Simple application
 Basic coverage for accountants,
bookkeepers and tax preparers
 Tax engagements, planning
 Bookkeeping
 Reviews
 Compilations
 Independent contractors
 Notary public

34. 05/22/13RISKPRO34
Broad Coverage
 More detailed application
 Higher limits and deductible options
 Coverage for reviews and audits
 SEC acts/security related activities
 Computer hardware/software sales
 Investment advice, management
advisory and financial advising
 More ERP options (1,3,5 years)
 Free Death or Disability ERPs

35. 05/22/13RISKPRO35
Supplemental Payment Features
 Defense Costs Outside Limits
 Loss of Earnings (per day/aggregate)
 Regulatory or Governmental Actions,
Disciplinary Proceedings (aggregate per
policy year)
 Subpoena Response Assistance (legal
representation)
 Pre-Claims Assistance (reporting of events;
legal representation; subsequent claims
covered)
 Mediation Deductible Credits

36. 05/22/13RISKPRO36
Special Endorsement Coverage
Options
 Electronic media exposure including social
media
 Cyber liability and identity theft
 Sarbanes Oxley
 Gramm Leach Bliley
 Life insurance sales
 Services as a registered rep
 Employment practices liability (defense
only)
 Non-Profit D&O (low limits)

37. 05/22/13RISKPRO37
Summary
 Questions?
 Underwriters’ views on CPA firms, factors to
assess premiums, claims and actions to
mitigate risk of a claim
 Improve your CPA Practice and Services to
Your Clients
 Coverage Checklists on Professional, EPL
and Cyber Risk

38. 05/22/13RISKPRO38
RISKPRO Insurance Agency, LLC
Gerald P Brunker, CPCU, ARM
Principal/Owner
 Facebook: Gerald Brunker & RISKPRO
Insurance Agency, LLC
 Twitter: RISKPROInsAgy
 LinkedIn: Gerald Brunker
 Blog: www.riskpro.us/blog
 Email: brunker@riskpro.us
This presentation can be found online at:
http://www.slideshare.net/GeraldBrunker/cpa-presentation-may-18-2013