UK: Risk Management For Accountants

Last Updated: 16 November 2012
Article by Alex Ktorides

It is true that accountants are well ahead of most other professions when it comes to risk management and certainly, the "big four" have had in place risk management processes and dedicated resources far earlier than solicitors, IFA's and surveyors to name but a few. However, this is no time to rest. Clients are running out of money, as the slow asphyxiation of the credit crunch finally chokes their life blood, and liquidators, litigation funds, irate investors and shareholders are starting to see litigation as a viable business plan. It seems a good time to re-visit the touchstones of risk management for accountants.

The risks facing accountants are varied: damage to reputation from bad clients or from losing data, claims from third parties as well as clients; failing to plan to detect fraud in the audit process; claims for missed time limits and challenges to (not so) "brilliant" tax schemes by HMRC. Modern day accountancy firms also offer investment management and financial services too, as the next "AIG" glut of claim cannot be far away. Add to this the complex issues involved when the various regulators come calling and the risk picture becomes complete.

Dealing with these topics fully is beyond the scope of this article but some of these measures if adopted will see off a number of these threats and otherwise bring down the risk to an acceptable level with which to do business.

Accountants are perhaps unique because of the way that their work can be expected to be of interest to parties not even being asked to pay their bills: the investor carrying out due diligence or the bank deciding whether to continue support. Clients can and do expect great service but there is so much that can go wrong with tax advice, or corporate finance activities or audit, that the terms on which clients are retained can define whether a claim will get off the ground or not.

Risk management for accountants should therefore start with the engagement letter. This is a must and should contain a number of key elements: the scope of work to be carried out; a reasonable and negotiated liability cap; terms of business and use of data; confidentiality; and how the work can be used or relied upon. These matters can be incredibly important. For example, in BP v Aon, the liability cap Aon had placed in its engagement with BP for the Texas part of the retainer was found to bite, but because some of the work had been carried out in London but the Aon office here had no engagement letter with BP, BP was able to bring a claim in the UK for all the loss thus avoiding the only (UK) liability cap that had been agreed. The mistake cost Aon £45 million. This highlights the need for engagement letters and that care must be taken over the identity of contracting parties and binding all those that the accountant considers might be relying on his or her work.

Turning to third parties. That duties to third parties can be owed by accountants is something that is now accepted and though there does have to be some extra element of "foreseeability", this can be a surprisingly easy duty to trigger. There are various tests but it seems clear that if the accountant knew his or her work was to be relied upon by a particular party for a given purpose and that party did so rely, a duty can well arise. It is easy to see how this may happen in practice. Client A is selling part of its business to B. B's advisors ask to see the draft accounts prepared by accountant C as well as reports that C have recently prepared on cash flow for its lenders. Accountant C has clear duties to A and the lenders and these duties are regulated by the terms of engagement agreed between them (including a liability cap) but B is looking to rely on accountant C's work. If B, in these circumstances, relies on the draft accounts or the report and suffers a loss because something in those documents is incorrect, accountant C faces the prospect of an unlimited claim. The ICAEW, in its technical releases sensibly recommends that when receiving such requests, accountants like C should ask B and its advisors to enter into an agreement which "holds harmless" C from any damage that may be sustained by B should it rely on the information C is providing. It is suggested that a prudent accountant would also seek an indemnity from A in providing the information and include a disclaimer in its work before handing this over. This is useful when other parties may see the work further down the line as often happens in cases of syndicated lending.

There are also steps that can be taken to mitigate the risks when the regulator seeks information and documentation from the accountant. In the case of the SFO, its powers should be carefully monitored and only once the accountant is satisfied that the powers are being exercised correctly should information about a client be handed over. The duty of confidentiality will give rise to an action in damages against the accountant unless the accountant is properly "compelled" to hand over the information in question. In practice, the accountant should demand a "Section 2" notice from the SFO, after discussing the scope of such request, which will then provide a defence to a confidence claim later down the line. It is also a good idea to negotiate, as a matter of time management and cost reduction, the amount of information to be provided and the method. The regulator, such as the SFO, may not be using the same electronic document system as the accountant and a discussion over IT, no matter mundane this may seem, can save a great deal of disagreement and money.

Turning to audit, the auditing standards issued by the Auditing Practices Board of the Financial Reporting Counsel are to be observed. Compliance with the auditing standards will be cited by claimants seeking to show that an audit was deficient and therefore the standards take on high significance in disputed claims. Training and proper planning are therefore key. The relationship with the entity being audited, via its directors and shareholders, can be a reason why an audit fails to detect serious issues and accountants should be training to pick up the warning signs (lack of risk management processes, controlling shareholder or charismatic chairman, unexplained debts, avoidance of the auditor and late provision of information).

In addition, the use of outside "member firms" or other outsourcing can be the source of error and claims. Audit work should be done centrally with proper and proportional partner supervision. Audit software packages, often designed in-house, should be refined and improved each year. A level of professional scepticism throughout is healthy when audits are being carried out.

There are a number of other ways for the accountant to limit the risks of being in business. The treatment of indemnities and warranties, which potential and existing clients seek, can be significant. In the rush to get on with new and exciting work, these terms of business are often left but a sensible discussion with the client at the contracting stage can save pain later. An indemnity, for example, for the negligence of a secondee sent to work for 6 months at a merchant bank could lead to a catastrophic claim against the accountant unless that indemnity is carefully worded and "capped" with a financial limit. Similarly, the incorrect selling of tax schemes which are "100% safe" can be mitigated by more circumspect language.

A note for modern day accountants who join a network of firms. Care needs to be taken here, as claimants look for the firm with the largest professional indemnity insurance policy to enforce against. There are a number of cases on the issue of cross-border liability and the legal position, it is submitted, may still evolve, but cases involving BDO in the US and PwC in India for example, highlight the fact that claimants will try to bring novel claims. The risks for accountants who are member firms lie in claims being brought in other jurisdictions, which are unpredictable and expensive to fight. Proper control of each network firm and clear separation of legal personality is key, as is the introduction for all members of contractual arrangements with each client. So, if you are about to join an international network, think about adding a clause to your terms of business which states that clients are not able to bring claims against other member firms, even where those members are acting jointly on a particular job, even as sub-contractor.

Finally, insolvency office holders will continue to appear on the scene, seeking access to the accountant's papers. A careful approach is needed if the request is to be controlled. The difficulty is that the rules are complex, with case law on ownership of papers differing slightly from the recommended practice from the ICAEW (see Chantrey Martin v Martin as a starter) and insolvency office holders themselves either not entirely aware of the subtle differences in the rules or choosing to ignore these. A rule of thumb is that liquidators are rarely entitled to either the entire file or to ask unlimited questions of the former accountant or auditor. The ownership of papers turns on the capacity of acting, with auditors owning almost all originals and copies and tax advisors owning little, aside from original letters it receives or notes it makes entirely for its own purposes. As long as the liquidator is kept in check and the powers under the insolvency act used responsibly and proportionately, a sensible deal should be done as soon as possible when an access request comes in.

In summary, whilst none of the above steps are a panacea for loss or future claims, they are sensible and occasionally vital. Just having an engagement letter, signed by the client, with defined terms and a clear scope of the work to be done, a reasonable liability cap that will withstand challenge and the correct approach to confidentiality and how the use of the accountants work is limited and must be agreed in writing, will all be huge steps towards keeping the risks to a sensible level for doing business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alex Ktorides
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.