Six Risk Management Mistakes CPA Firms Make

Managing CPA liability risk exposures is a complex process, and it’s easy to underestimate the potential for risk along the way.

The following six mistakes can be avoided by being aware and taking the right steps, says Tim Huggins, who is manager of underwriting operations of CAMICO.

  1. Not discussing questions about the insurance application with your underwriter or agent. Whether it’s for a new or renewal policy, the better the job you do with the application, the better your chances for avoiding mistakes and problems. Take time to review the questions and determine what information and data you will need for it. State information accurately. Applications are not opportunities to market or embellish your firm’s profile. Misstatements may result in a higher premium or even the rescission of a policy based on wrong information.
  2. Not having appropriate policy limits for your firm profile. Excessively high limits of insurance offered at bargain prices are red flags. High limits will often put a bigger bulls eye on your firm and potentially lengthen the claims process. However, you also need to carry enough limit to be able to protect yourself in the event of a bad claim, or to fight a frivolous claim. A specialized underwriter, agent or account executive can discuss your firm’s specific risk exposures, policy limits and coverage options.
  3. Admitting liability, assuming damages, voluntarily making any payments or incurring claims expenses. These are all actions a CPA firm must avoid without the prior written consent of the insurance company. Such actions will likely violate policy conditions, which may result in a denial of coverage. Policyholders should not take action without first receiving guidance from a risk adviser with the insurance company. Avoid agreements that include “hold harmless” or indemnification provisions that are one sided and not in the firm’s favor.
  4. Not reporting a potential claim as early as possible. The sooner claims and potential claims are reported, an insurer can more effectively achieve an early resolution. Early reporting will also help assure coverage for the potential claim. Some insurers encourage early reporting by reducing the deductible for any potential claim reported before a claim is made. Further, if it is determined that it is appropriate to retain legal counsel to assist with a pre-claim situation, some insurers will absorb the legal expenses, help policyholders achieve a resolution with the client, prepare a tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide subpoena and other services if the need arises. CPAs are often so busy they don’t recognize or acknowledge a potential claim as it is developing. This can be particularly devastating when the damages claimed are significant and are not covered because of late reporting.
  5. Not utilizing the insurance program’s advisory, loss prevention and risk management services. The best way to avoid a claim is to manage risks that lead to claims. Some basic risk management tools – such as client screening, engagement letters and follow-up documentation – are crucial in managing potentially major problems into minor problems. The more tools and resources an insurance program provides for policyholders, the better those policyholders will be at avoiding or minimizing problems and disputes. A good insurance program will also advise you on how to utilize its resources to help your firm improve its practices.
  6. “Dabbling” in high-risk work without doing enough to stay proficient at it. Claims data show high loss ratios for services that comprise less than 15% of a firm’s work. By the same token, loss ratios are low for services that comprise 65% or more of a firm’s work. Also, part of the client screening process includes making sure an engagement is a good fit for the firm’s expertise.