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The right policy can save your business. The wrong one .....?

Picking the best professional indemnity policy for your business is a complex matter but buying the right insurance is vital. There is no point, after all, in either paying for benefits you won't need, or buying a cheap package if you are not confident that the insurer will actually pay out if you have to make a claim! Fear not though, we have experienced specialists available who can help you through the maze.
Why isn't PII simple?
Because all our businesses vary so much, the type of policies we need vary too. Many different types of work are undertaken by accountants, and accountancy is an industry with a wide range of different sized operations, ranging from large multinational companies to self-employed book keepers. Practitioners may hold professional accountancy qualifications or be highly knowledgeable in a specialist field such as taxation, where they may well have worked in a senior position for Her Majesty's Revenue and Customs (HMRC) in the past. Accountants deal principally with the financial affairs of others. Put simplistically, they aim to present audited accounts showing profit and loss, to legally minimise taxation and make sure that tax liabilities are paid on time, without penalties being incurred. The potential for error is significant and it is essential that individuals and companies, irrespective of the size of their businesses, have enough insurance in place. A number of bodies cover the profession and each one sets minimum standards for professional indemnity insurance which must be met by prospective members.
Insurers" requirements.
Like insurers in other areas of life, those companies providing professional indemnity insurance for accountants expect those taking out insurance to have taken steps to mitigate potential risk. They will expect practitioners to have the relevant professional qualifications covering the work they do, or, if not, be able to offer other evidence of their credentials and experience in the specific field of accountancy in which they are working.
Proposal forms.
Proposal forms are designed to elicit the information insurers need to be able to assess the level of risk. In particular, they will be interested in the details of the work being undertaken. This can be ascertained from examining how fees charged for accountancy services are broken down. However, some proposal forms are quite short and to ensure that professional indemnity insurance is both comprehensive and sufficient it is advisable to give insurers other information about the nature of the business, specifics of the work carried out and any previous claims records.
Full disclosure is essential.
Presenting the business in a positive way, explaining how it operates and setting out the cover needed, helps insurers to assess the risks involved. It is advisable to supplement the information provided on proposals forms with additional submissions, for example:
  • CV setting out qualifications and experience;
  • A company prospectus;
  • Safeguards in place to mitigate risk and lessons learned from any previous claims made by clients;
  • Details of selection procedures to ensure the calibre and credentials of staff;
  • Website details; and
  • Full disclosure of earlier professional indemnity insurance coverage and claims.
It is also essential to keep insurers fully appraised of any changes in the nature of the business, or the work being undertaken. This is particularly relevant where a company is growing, taking on more staff and engaging in new areas of work.
Professional Indemnity Cover for previous work.
Many large multinational companies absorb smaller ones on a constant basis. In addition, small accountancy firms and solo practitioners take over businesses all the time. In every case, importing parties must make sure that their professional indemnity cover is sufficient to include any claims arising from work carried out in the past, not just by their own company, but also by employees who worked in businesses they have taken over.
Usual cover and wording of policies.
The wording of a professional indemnity insurance policy is of paramount importance. For large professional accountancy companies this will usually be on a civil liabilities basis; although smaller operations might be able to define sufficient cover in minimum approved wording. Irrespective of whether the drafting is for civil liabilities or minimum approved wording it should include the following:
  • Costs and expenses likely to be incurred by the company/individual;
  • negligence;
  • liability for dishonesty by staff;
  • lost paperwork; and
  • slander and libel
Practitioners without formal qualifications or any obligation to meet the requirements of a professional body should get expert advice to ensure they take out comprehensive, and sufficient, professional indemnity insurance to cover them fully for the work they do.
How insurers assess risk.
Insurers covering accountancy work term risk as hazard, categorising it as high, standard, low or variable depending on the size of the insured parties' business, and the nature of the work undertaken, including considerations about the client base of the companies the insured party is doing work for. Examples of the different categories of hazard are listed below.
High hazard, where work includes:
  • Quoted companies where stocks and shares can be bought and sold on the stock exchange. These companies will have a high public profile, particularly if they are finance houses, and are also likely to have a huge customer base from which claims could come;
  • Mergers, acquisitions, disposals, where the amount of money involved will be substantial and buyers will expect thorough investigations and reports from any accountancy firm under contract to them; not withstanding their own due diligence;
  • Insolvency, liquidation, or receivership. Like mergers, acquisitions and disposals, large amounts of money are involved and there is likely to be a number of vociferous creditors trying to recover losses.
Standard hazard, where work includes:
  • Personal taxation. This will probably be undertaken for small to medium-sized companies who need professional help to keep their accounts and tax affairs in good order. Alternatively, clients may be high earners like premier league footballers or entertainers, whose financial affairs are complex.
  • Companies not listed on the stock exchange where the public profile and client base is not as high as listed companies.
Variable hazard, where work includes:
  • Corporate taxation; depending on the type of work involved.
Low hazard, where work includes:
  • Management consultancy where only high level strategic advice is provided. However, should an accountancy firm be engaged to temporarily manage a company in jeopardy, the level of hazard will increase significantly.
Professional Bodies
In the UK, professional bodies covering the field of accountancy include:
  • The Institute of Chartered Accountants in England and Wales (ICAEW) which claims to be a world leader in the accountancy and finance profession, offering a range of services, including information, accredited training schemes, advice and support, and networking opportunities to about 13,000 members.
  • The Association of Chartered Accountants (ACCA) which is 110 years old and professes to be the world's leading body for professional accountants, providing opportunities within the profession and striving to improve it.
  • The Chartered Institute of Taxation (CIOT, a registered charity operating in the UK solely in the field of taxation. It's main aim is to work for an efficient tax system.
Each of the above bodies have an approved level of professional indemnity insurance that they expect members to meet as a condition of membership. A brief summary is provided below although advice on specific requirements should be obtained from the bodies themselves:
  • ICAEW – Indemnity equal to two and a half times the gross fee income in the last financial year, subject to a minimum of £100,000 and a maximum of £1.5m. An allowable excess of £30,000.
  • ACCA – The level of indemnity is based on professional and other income, including commissions, which accrued in the last financial year. It requires a minimum level of cover of £50,000, with cover above that determined by company income up to £1m or 25 times the largest fee raised in the previous year for services to one client. The ACCA allows membership to companies operating outside the UK, the Republic of Ireland, the Channel Islands and the Isle of Man, which meet the professional indemnity requirements of professional bodies in the country in which they are operating.
  • CIOT – An indemnity limit of £1m per annum is expected although exceptions are made for companies that earned less that £400,000 in the last financial year. In these cases, cover is based on income subject to a maximum of £100,000 for solo practitioners and £200,000 for others.
First time and renewal cover
It is not advisable to apply for insurance from several different insurance providers at the same time as this can result in some insurers simply being unwilling to provide cover. Parties looking for cover should take advice, perhaps from a professional body, on the type of insurance required and the best brokers to approach to get quotes. It is crucial that cover is comprehensive and sufficient to cover the work undertaken by the insured party. If insurance renewal is sought, the insurer must be brought fully up-to-date with regard to any changes to the company and new work undertaken. Cover for previous work also needs serious consideration.
In conclusion
Dealing with the financial affairs of others can be a very risky business. Large corporate accounting companies are likely to make sure their professional indemnity insurance provides more than adequate cover. Smaller firms and solo practitioners should be equally vigilant and take professional advice about their insurance requirements and review them regularly. The risks cannot be underestimated and failure to be able to contest or compensate a claim can have very serious ramifications.

Accountancy - what is the worst that can happen?

The London Taxi Company

Manufactured in Coventry since 1948 and originally designed as the Austin FX3, the iconic London taxi has been made by the London Taxi Company since the early 2000s. A subsidiary of Manganese Bronze Holdings plc, who were in turn 20% owned by Chinese car maker Geely, the London Taxi Company and its black cabs played a central role in the closing ceremony of the London 2012 Olympics.

The company's shares took a nose dive of 34% in just one morning shortly after the Olympics, due to a £3.9 million accounting issue. The report from the auditors attributed the mistake towards 'systems and procedural errors" in the previous two years, which cumulatively led to an understatement of historical losses.

Further analysis revealed blame on the transition to a new integrated software solution, designed to help manage the company's global supply chain and transfer the ledger balances from it's previous system. The auditors and the company discovered ensuing errors which led to the overstatement of stock and understatement of liabilities in the financial statements of the previous years.

As a result of the accounting error, the London Taxi Company went into administration a few months later, shedding more than half of its 300 strong workforce. Eventually, after months of negotiation, it was bought by it's current minority Chinese shareholder Geely. Today's London cabs are still made in Coventry and they are as iconic as ever, albeit with a change of owner.

Superdry

The highly successful online and offline fashion label Superdry, hailing from Japan and sold in 54 countries, is a brand of the SuperGroup plc retail group. It is quoted on the London Stock Exchange and one of the companies that make up the FTSE 250 stock market index. The group has 105 standalone stores in the UK and Europe combined, with Superdry and Cult retail brand presence. It also has 270 franchises or concession stores.

In early 2012 Superdry's share value took a 38% tumble as a result of a massive accounting issue. Announcing a £2.5 million accounting error discovered in a routine audit, the group issued a profit warning which immediately had an adverse impact on its share price. The overall damage was £170 million as the company's share value was wiped off owing to a £2.5 million accounting shortfall impacting profits from its wholesale business.

What was most startling about this fiasco was the fundamental nature of the error. Described by the finance director as "arithmetic errors", it turned out to be a very basic mistake - a "plus" instead of a "minus" in the company's accounts. How it could have happened at such a senior level was never explained properly. When calculating the value of stock that was moving around the business, £1.25 million was added instead of being subtracted, resulting in an overall £2.5 million gap.

The problems for Superdry didn't end there. The company also misjudged forecasts in it's same wholesale division as well as the retail business, leading to two further adjustments of £2 million each. In the end this meant its pre-tax profit forecast was cut by £6.5 million, which was a very costly mistake that Superdry has hopefully learnt to avoid in future.

Department of Defence, Canada

Canada's National Defence accounts for 7% of the overall federal budget. When Canadian federal auditors discovered accounting errors amounting to an estimated $1.5 billion in a routine audit of the Canadian Defence Department's books, the official verdict was an euphemism of understatement which simply labelled the huge accounting blunder as 'significant". It is hard to disagree with this verdict at a cost of CAN$1.5 billion!

In it's report, the Auditor General's team found problems such as double counting - the same ship-borne anti-missile system had been counted twice - leading to a $210 million error, inaccurate reporting - the price of torpedoes was misstated - by $15 million, and fundamental inventory mistakes - somebody forgot to remove two CF-18 fighter jets from inventory after they had crashed in well publicised training incidents.

Other problems were also discovered, such as failures to record changes in inventory concerning a retired fleet of Chinook helicopters to the value of $81 million, and vehicles held for disposal at a depot in Montreal worth $36 million. There was also an additional sum of $200 million incorrectly recorded for services that hadn't been supplied yet.

As a direct political result of the auditor's report, Canada's National Defence budget was slashed by $2.1 billion, a 'significant" sum following the Auditor's example of understatement.

Tech Data

A NASDAQ listed corporation with annual sales of over US$25 billion, Tech Data is a 40-year old US-headquartered giant and veteran ICT equipment distributor. So how did an embarrassing $27 million (£16.55 million) set of accounting errors in its UK subsidiary come about?

In the end, forensic accountants were called in and the net result was that $27 million of the corporation's profit from the last three years were wiped out. The Committee of Auditors, comprising of independent investigators and lawyers, found systemic accounting failures in the UK and two other European markets.

They found "… errors from improper vendor accounting, improper use of manual journal entries and improper recognition of foreign currency exchange transactions". The word "improper" was also highlighted in the dismissal of certain staff in the UK and elsewhere, on the grounds that they were "responsible for accounting improprieties".

Other clues pointing to the cause of the accounting blunder and subsequent sequence of events might be inferred from the company's decision to change its compensation programme "…to better motivate accurate financial reporting and compliance".

And if this wasn't enough to conclude what went wrong, more insights came from the letter sent to all staff members reminding them of ethical conduct and "the imperative to comply with laws, codes of conduct and company accounting policies". For it's UK division, the company has announced the appointment of "external experts to perform the internal audit function and to assist with the implementation of specific fraud detection procedures".

Blackpool Council

After another accounting issue, although not in the same big league as the above, but nevertheless causing a backlash from disaffected stakeholders, Blackpool Council was forced to write off more than £31,000 in debt and was slammed publicly by both trade unions and its own councillor members.

One irate councillor told the Blackpool Gazette, "we are a council forever saying we are strapped for cash and can't do this and that... but we could have kept a staff member employed for a year with this money".

Things started to go wrong when the council sold off some of the items that had been discarded at its municipal recycling centre for household waste. There was residual value in goods deposited at the centre by the citizens of Blackpool. Item such as home electrical equipment including working vacuum cleaners, kettles and toasters as well as textiles and bric-a-brac all had value.

An accounting blunder arose when the goods were sold by the council to a reclamation business between August to December 2012 for a grand total of £31,342. However, the council never actually invoiced the reclamation business for the items. By February 2013 the company which bought the goods went into liquidation. As no invoices were ever raised against the transaction by the Council they had no claim at all to the funds from bankruptcy proceedings.

Affected stakeholders were furious at the turn of events, quite predictable and understandable as Blackpool Council were proposing to cut around 700 jobs over the next two years as part of plans to save £36 million.

Diamond Foods

Diamond Foods is a giant in the US snack food industry with an illustrious history and over a century's standing in the business, as well as a NASDAQ listing. It specialises in potato and nut based products amongst other foodstuffs. Founded in 1912 in California, originally as the Diamond Walnut Growers cooperative, it's sales now total over US$1 billion in 100 countries - and it owns world famous brands such as Kettle Chips.

Troubles began when Diamond fielded ambitions to acquire one of it's competitors, Pringles. This subsequently led auditors to identify major accounting blunders in Diamond's books, which in turn scuppered it's $2.35 billion bid. Subsequently, Pringles was acquired by arch rival Kellogg's.

Diamond had to restate it's earnings for 2010 and 2011 as a result of the accounting errors coming to light in the public domain by 2012. A settlement of $96.1 million in a class action law suit by active investors, a $5 million fine levied by the Securities and Exchange Commission and a personal penalty of $125,000 for then CEO Michael J. Mendes resulted from these accounting blunders.

In the final analysis, Diamond manipulated payments to nut growers in order to artificially inflate the company's own profits. This had the effect of pushing up it's own share price, giving it ammunition and market leverage to acquire Pringles. Nut growers, who were traditionally paid at intervals throughout the year, were underpaid in a given year but made up for it in following years with the difference using "continuity" and "momentum" payments. These were very creative terms and accounting practices devised by the Diamond team which misled stock market investors and drew the ire of the regulator.

The Tesco Scandal

One recent and high-profile example of a blunder by accountants came in September 2014, when Tesco admitted it had overstated its estimate on half-year profits by approximately £260 million. The artificially inflated figure came to public attention after a whistle blower identified an issue and forensic accountants investigated the company's financial affairs.

Essentially, it was found that the company had been paying suppliers later and taking money from them earlier than they should have. However, the figure of £260 million represented more than a quarter of the business" profits. Nonetheless, the company dismissed the idea of it being intentional fraud and insisted it was a mistake.

The consequences of the accountancy blunder were significant and still continue. In the immediate aftermath, the company's shares took a nose dive, falling by around 10 percent, whilst a number of executives were suspended. Various different inquiries into the mistake followed, before a full blown criminal investigation was launched.

California Miscalculates

Although costly, it is not at all uncommon for businesses to make mistakes when it comes to accounting. A more rare accountancy story emerged in 2014, however, when an audit revealed that the US state of California had made a miscalculation amounting to an astonishing $32 billion. To put that figure into further perspective, it is more than the GDPs of Jamaica and Iceland put together!

The error was partially the result of the State Controller's Office, fronted by John Chiang, making errors when calculating debt payments and overstating tax receipts. However, perhaps most incredibly of all, a simple data entry error meant the office also posted a deferred tax-revenue figure as $6.2 billion instead of $6.2 million.

“The number and magnitude of errors we found indicate the Controller's Office lacks a sufficient review process,” investigators concluded. To make the story even more unbelievable, John Chiang was running for state treasurer at the time. Despite his office's blunder, he was eventually elected to that post later in the same year.

Groupon Forget About Refunds

Over the course of it's short history so far, the deals and discounts website Groupon has been at the centre of a number of different accountancy issues. However, perhaps the most famous blunder came in 2012, when the company had to revise it's 4th quarter accounts for the previous year. The reason? They had failed to set aside enough money to cover customer refund requests.

The company blamed the error on introducing an increased number of more expensive deals, which customers were more likely to demand a refund on. Auditors Ernst & Young described the problem as a “material weakness in [Groupon's] internal controls” and highlighted issues with the website's financial statement close process.

Whatever the exact cause of the blunder, investors were left less than impressed as Groupon went on to revise their financial results for the quarter, adding an extra £14 million in losses to the previously released figures.

Prudent Plus Ltd is an introducer appointed representative of Seopa Ltd, of Blackstaff Studios, 8-10 Amelia Street, Belfast, BT2 7GS which is Authorised and Regulated by the Financial Conduct Authority number 313860. These facts can be checked by visiting the FCA website.

We do not give financial advice on this website. If in doubt get professional advice and always read the policy information before purchasing an insurance contract.