Accountants face increased legal action and higher insurance premiums, warns Marsh

London, 15 December 2008

Deteriorating economic conditions and a subsequent rise in company insolvencies will increase the number of claims against accountants and auditor firms, according to Marsh, the world’s leading insurance broker and risk adviser. In turn, Marsh predicts that the present soft market for accountants’ and auditors’ professional indemnity insurance (PI) could harden for some firms in 2009.

Troy Russell, a vice president in Marsh’s Financial and Professional Practice, explained: “Accountants and auditing firms with a client base of non public limited companies and financial institutions generally have better claims records than other professions and this is reflected in their insurance premiums. In 2008, the PI market for accountants and auditors continued to soften and many firms received premium rate reductions.

"However, insurers are already taking a tougher position on rates for other professions, such as the legal sector, where the market is already showing signs of turning. It is likely that, due to current economic conditions, this trend will also affect accountants and auditors when they come to renew their insurance policies."

As financially struggling clients seek to recover their losses, key risks for accountants and auditors include:

• A fair valuation of assets and the requirement to “sign off” on company accounts will be difficult to assess in the volatile market, given the reliance on ongoing lending terms being provided by their clients’ bankers.
• The discovery of fraud is also likely to increase: Marsh expects firms will be challenged to demonstrate that sufficient care has been taken.
• Clients will try to recoup their penalties and interest payments for late tax returns from their accountants and auditors; in buoyant times this is usually overlooked.
• Firms are also likely to experience an increase in fee payment disputes, as their clients seek to pay a reduced fee as a result of their weakened financial position.

Troy Russell continued: “Good risk management practice is vital if accountants and auditors wish to maintain the competitive premium rates that they currently enjoy. It is imperative that they also have full transparency with their clients and that terms of engagement letters are kept up to date to ensure no ambiguity or room for manoeuvre, should the worst happen.”

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