Preparing for increased regulation

Following several high-profile financial scandals, including the collapse of Carillion, Bargain Booze owner Conviviality, Silent Night, Thomas Cook and Patisserie Valerie, many accountancy firms are facing further regulation from the Government.

The reforms to modernise the country’s audit and corporate governance regime consultation is designed to overhaul auditing and corporate governance and could have far-reaching implications for accountancy firms. Proposals include breaking up the ‘Big Four’ firms via shared audits and introducing an audit watchdog. This increased scrutiny will lead to many firms checking they are financially protected against the possibility of future claims, reviewing both their risk management procedures and professional indemnity insurance (PI) provision.

Increased regulation

As KPMG faces one of the largest fines in UK audit history after former staff forged documents and misled the regulator, the government’s consultation proposes to break up dominance of “Big Four” accountancy firms. Government’s proposals aim to increase financial transparency in business, avoid companies going bust and to UK protect jobs. It also claims the proposed reforms will strengthen UK’s position as a world-class destination for investors by improving the quality of corporate reporting and sharpening focus on long-term success of large companies.

Business Secretary Kwasi Kwarteng: “Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy.”

Protecting your balance sheet

Despite every effort to maintain the highest professional standards, things inevitably go wrong. While audits and company mergers are among the problems affecting larger firms, human errors such as not submitting some paperwork on time can have substantial consequences for clients and result in an expensive claim.

PI insurance protects accountants from the legal costs associated with a client claim for issues arising from human error and incorrect advice. PI insurance is a useful part of a firm’s business acquisition strategy. It demonstrates a level of professionalism, and many clients will ask to see proof of insurance before working with a firm.

Protecting against the unknown

Only chartered accountants or those with accreditation from their professional body are required to have a minimum level of PI cover. Non-chartered accountants are not usually required to hold professional indemnity insurance. However, PI cover provides financial protection for the accountant and client for a covered incident.

Some common examples of errors include:

1. Bad advice – You could be held liable if that advice results in legal action against your client or a fine that causes significant financial loss to your firm.
2. HMRC paperwork – A simple failure to submit the correct paperwork on time could generate a hefty bill for your client.
3. Inaccurate data entry or information – A simple mistake such as entering an incorrect number, entering the correct number in the wrong order, or entering numbers instead of words or vice versa, can lead to a claim.
4. A compensating error – A mistake when calculating or recording accounts that are equal (in amount) to an opposite mistake so that neither affects the final total and goes unnoticed.

While the accounting world waits for the Government’s next steps regarding regulation, getting PI cover as part of a broader risk management strategy will undoubtedly be a step in the right direction.

Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.

Categories: Professional Indemnity,