Many of the mistakes that result in professional indemnity claims are avoidable, says Richard Flinn, a specialist insurance lawyer and partner at Wotton + Kearney in Wellington.
Flinn specialises in insurance litigation, and one of his practice areas is accountants’ professional indemnity. With years of experience under his belt, including helping Crombie Lockwood clients, he has seen certain claims come up again and again. Here, he talks about three of the most common in New Zealand, and how to best avoid them.
1. Trustee-related claims
“These are claims that are brought against a trust for which one of the independent trustees is an accountant, often by either Inland Revenue or a disgruntled beneficiary,” says Flinn.
“Problems tend to occur because the accountant has a passive approach to oversight of the trust’s business and allows the other trustees to conduct business without taking an active role in decision making.
“Accountants have an obligation to understand the trust’s affairs. If things go wrong, there can be recourse directly against the accountant. My practical tip is to not accept or continue trustee roles unless accountants are willing to understand what’s going on in the trust and take an active role.”
2. Conflicts of interest
“Breaches of conflict of interest rules most commonly arise when a clients’ circumstances change and catch a practitioner off guard.
“Sometimes relationships (whether business or personal) change over time, meaning that interests of clients that were aligned can begin to diverge. In those circumstances practitioners must be particularly aware of conflicts arising,” Flinn says.
“When a conflict does occur, it must be disclosed and (if possible) safeguards put in place to manage it. It is vital that conflict-related advice be recorded in writing, and cover in detail what safeguards are to be put in place and under what circumstances. This removes any doubt about whether the risk of conflict was identified and properly managed
3. Employee fraud
“Employee fraud occurs more than you might think,” says Flinn. “Almost invariably, it is done by a staff member who is trusted implicitly, who may perform an accounts-payable function for a client.
“Employee fraud occurs more than you might think. Almost invariably it is done by a staff member who is trusted implicitly.”
“Typically, it will involve limited checks around access to client accounts, such as poor internal processes and the lack of security measures such as multi-factor authentication. In some cases, the staff member may pay themselves from the client’s account to fund a gambling or other addiction of which their employer is unaware.
“The solution includes ensuring bulletproof processes around payment approvals; developing approval processes that involve more than one person; and regular training around security measures to ensure simple mistakes, such as sharing of credentials, never occur.”
Professional indemnity insurance
Insurers know claims trends and can sometimes seek to exclude cover for higher risk areas of business, such as those discussed above, in exchange for marginally cheaper premiums. To make sure your insurance is fit for purpose and covers these scenarios, and other common mistakes, talk to your local Crombie Lockwood insurance broker.
Find out more:
Crombie Lockwood is the New Zealand General Insurance Partner of the CA ANZ Member Benefits Program. For information visit crombielockwood.co.nz/accountants or call 0800 435 568.