The accountancy world has been adversely impacted by the COVID-19 pandemic and ensuing lockdowns. As we navigate the third phase of the crisis, what challenges await in the “new normal” and how can accountants begin to address them?
In common with most businesses, 2020 was a tough year for accountants and it’s not getting any easier.
In addition to the challenges involved in remote working, advising clients, financial pressures, and worries over job security – the twin spectres of COVID-19 and recession create a range of other concerns for accountancy firms.
Twin challenges create liability risk
A potential surge in professional indemnity claims should be chief among them. Firstly, recessions are known to increase the average number of fee disputes, complaints, and negligence claims. So, as we enter another recessionary phase, with more company failures and difficulties, we are likely to see a resurgence in claims being made against auditors and accountants.
Additionally, it seems likely the sector will see an increase in COVID-19 related claims against accountants in relation to tax and insolvency advice. It is fair to anticipate claims arising out of issues related to the Coronavirus Job Retention Scheme's tax reliefs (CJRS), grants, and VAT deferrals by businesses as HMRC looks to claw back payments to which recipients were not entitled or have over-claimed.
Much of the accountants' advice to businesses during this time may have been given very quickly in response to rapid changes in legislation and, in some cases, perhaps by practitioners transferred from other teams to help pick up the increased business, tax, and insolvency workload caused by the pandemic.
Where clients have become insolvent, liquidators may also look to scrutinise advice that may have added to the companies' problems, or advice regarding financial viability provided by accountants and insolvency practitioners.
Audit under pressure
Lockdown has also created some fairly significant issues for audit practitioners. There are, for instance, operational challenges associated with remote working, which hampers the usual on-site work to gather information, conduct stock-takes, and undertake face-to-face meetings to question and challenge company personnel and management.
Then there are related difficulties around assessing whether or not audit clients are going concerns. The revised FRC concern standard, ISA UK 570, requires accountants and auditors to robustly challenge an audit client's management about their key assumptions, additional stress testing, and disclosures in financial statements. This is a significant area of risk and one where auditors must be able to demonstrate they have sufficient, appropriate audit evidence when testing management’s assumptions and forecasts.
Meanwhile, times of economic and social instability, where professionals and businesses are under considerable financial pressure, may lead to an increase in fraud related claims ‒ where parties could be induced into taking illegal actions to address either their own or their companies' needs.
This risk can be exacerbated when company oversight and checks may have become diluted, but with accountants’ responsibilities in relation to fraud now more contested more than ever, any failure to spot or report suspected fraud is another serious risk facing accountants.
Take action to manage risk
In the face of these risks, the ICAEW, ACCA, and FRC have been reminding accountants to maintain their integrity, objectivity, and professionalism in these trying times.
Even so, the risk of a rise in professional indemnity claims against accountants is very real and should not be overlooked. Part of the answer is to minimise risk – ensuring accountancy advice is well thought out and recorded – but there is no substitute for robust professional indemnity insurance to protect finances and reputations for those firms that do find themselves facing claims.
So, the advice for accountants has to be two-fold. First, review your processes to ensure accountancy advice is accompanied by the proper professional oversight, and recorded in detail. And second, review your insurance arrangements now to ensure you have the level of cover you need should the worst happen – if in any doubt, speak to your insurance broker to check, and get valuable advice on minimising and managing your professional risks.
Marsh Commercial is one of the UK’s leading commercial insurance brokers with a specialism in professional services. It is part of Marsh, the world’s leading insurance broker and risk adviser and has over 35,000 colleagues operating in more than 130 countries. It has a 45-strong team of professional indemnity (PII) experts that specialise in protecting accountants. It has been the appointed PII broker for ICAEW for 14 years and currently protects more than 4,000 members with its bespoke solutions. It also provides office and cyber insurance to ICAEW members that have been built specifically around accountancy needs.
If you would like to find out more about ICAEW's PII scheme or receive advice on your current PII policy, please get in touch with our dedicated ICAEW team on 0345 894 4684 or email ICAEWenquiries@marshcommercial.co.uk