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At the beginning of each new year, we review trends and patterns in claims made under ICAEW professional indemnity scheme over the last 12 months. In this article, we’ll explain some of the enduring issues that shape the landscape for accountants’ negligence claims. Then, most importantly, we’ll highlight ways you can mitigate these risks in your own business going into 2024.
Top 5 professional indemnity insurance claims made under ICAEW Members’ Scheme in 2023.
1. Failure to comply with filing deadlines.
One of the recurrent challenges faced by accountants is the failure to comply with filing deadlines, resulting in interest and penalties imposed by HMRC. While these claims are often of relatively low value, the consequences can be significant for both the accountant and their clients.
The additional tax is often unavoidable, frequently making the focus of these claims centre around the recoverability of interest and penalties imposed by HMRC. Even if the tax has been paid, HMRC may still impose penalties for late submissions.
Steps to mitigate risk:
- Maintain a robust diary and case management system to flag approaching deadlines.
- Proactively gather all necessary information well in advance of submission deadlines.
- Effectively communicate with clients to prevent delays and maintain a clear paper trail of all interactions.
2. Providing incorrect taxation advice.
Claims arising from incorrect advice on taxation matters, leading clients to incur avoidable tax liabilities, are an enduring challenge. Inaccurate guidance on the availability of tax reliefs, such as Entrepreneurs’ Relief, can have substantial financial repercussions for clients. For instance, advising against the premature transfer of shares before the sale of a company could prevent the loss of tax relief, thereby reducing the risk of claims.
Steps to mitigate risk:
- Clearly define and document the scope of engagement in writing.
- Limit advice to matters falling within the agreed-upon engagement terms.
- Ensure continuous staff training on current tax rules and regulations.
- Seek expert advice for areas beyond the accountant's expertise.
3. Failure to identify material transactions in audits.
Accountants continue to face claims for failing to identify and report on issues with material transactions during audits, with some notable cases in recent years involving large firms.
Steps to mitigate risk:
- Customise audit strategies based on each client’s unique circumstances.
- Clearly outline the scope of audit services in engagement terms.
4. Negligence in advising on company structure and personal tax affairs.
Claims often arise from allegations that accountants should have advised clients to restructure their business entities for tax advantages. It’s crucial to assess whether such advice falls within the engagement terms, and accountants should consider the client's hypothetical actions if such advice was given.
Steps to mitigate risk:
- Clearly communicate engagement terms in written agreements.
- Limit advice to matters within the defined scope.
- Consider the hypothetical actions of the client even if advice falls within the engagement terms.
5. Failure to properly prepare end-of-year accounts.
Another persistent risk involves the failure to appropriately prepare and file end-of-year accounts with HMRC and Companies House. Allegations of negligence may arise if these documents aren’t filed correctly, potentially leading to financial repercussions for both the accountant and the client.
Steps to mitigate risk:
- Prioritise the accurate and timely preparation of year-end accounts.
- Implement rigorous quality control measures to ensure required documents are properly filed.
By staying vigilant on these common pitfalls and implementing proactive risk mitigation measures, you can navigate potential negligence claims and enhance the overall quality of your services.
What’s around the corner?
Let’s look at recent developments and claims trends that started to evolve during 2023 and which we’ll likely see continue into this year.
Research and development tax relief claims.
Research and development (R&D) tax relief scheme continues as a vital mechanism for supporting companies engaged in science and technology projects. Throughout 2023, several changes to R&D tax relief have been implemented, including alterations to key areas such as the small and medium-sized enterprise (SME) R&D tax credits scheme. This has resulted in a reduction in the available tax relief.
Concurrently, there appears to have been a marked increase in the number of R&D tax relief claims facing challenges from HMRC. The tax authorities are taking a closer look at the eligibility and substantiation of claims. This has lead to heightened scrutiny and, in some cases, disputes over the validity of submitted claims.
The changes implemented and the increased level of oversight amplifies the potential for negligence claims. Accountants perceived as having provided inadequate advice on R&D tax relief matters are at particular risk. The increased frequency of claims has already begun to increase across the market and seems likely to continue.
In light of these developments, accountants must adopt proactive measures to protect themselves from potential negligence claims related to R&D tax relief.
Steps to mitigate risk:
- Stay informed and updated.
- Maintain clear and detailed documentation.
- Check the current rules and regulations every time advice is provided.
Audit-related negligence claims.
While claims arising from undertaking audits pose a longstanding risk to accountants, there has recently been a surge in cases involving significant errors made by major UK accounting firms. This further shapes the nature of negligence claims associated with audit services.
A prominent example illustrating this trend is the landmark case involving KPMG, one of the ‘big four’ auditors, which incurred a record £21 million fine from the UK accounting regulator, the Financial Reporting Council (FRC). This historic penalty stemmed from what the FRC deemed a ‘textbook failure’ in auditing the collapsed building firm, Carillion, in 2018. The deficiencies identified in the Carillion audits were characterised as exceptional, leading to the highest-ever fine imposed by the FRC.
The failures in the Carillion case were multi-faceted. Among these was a lack of challenge to Carillion’s management. The case serves as a cautionary tale for accounting professionals regarding the potential consequences of lapses in due diligence.
Steps to mitigate risk:
- Enhance audit quality control.
- Promote a culture of professional scepticism.
- Invest in ongoing training and education.
Important information for members
Changes to ICAEW's disciplinary framework
ICAEW implemented wide-ranging changes to its disciplinary framework, transferring process-related provisions from the Disciplinary Bye-laws to the new Investigation and Disciplinary Regulations. With a focus on simplicity, ICAEW removed archaic language, and incorporated the Code of Conduct for Complainants' principles. They also expanded the sanctions to include non-financial measures, such as a requirement for a member to undertake specific training or for a firm to implement training around a particular area to relevant teams.
ICAEW also introduced a 'lie on file' procedure for handling multiple complaints. This process pauses investigations into further complaints for members who have already been excluded. The complaints instead ‘lie on file’, to be reassessed in circumstances where a future application for readmission to ICAEW membership is received. They also broadened interim order thresholds for increased public protection.
Professional indemnity insurance consultation
ICAEW’s Regulatory Board is consulting on proposed changes to professional indemnity insurance. The review seeks to address the challenges stemming from evolving firm structures, financial capacity, and insurance costs. Proposed changes include increases to the minimum indemnity limits (generally to £2 million), adjusting requirements based on firm size and income, changes to self-insured amounts, and providing clearer guidance on dispensation applications.
The consultation period ran between 18 October – 14 December 2023, and invited feedback from various stakeholders, aiming to balance public protection with a functional and affordable professional indemnity (PI) insurance market.
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