At the start of each new year, we review the trends and patterns in claims made under the ICAEW professional indemnity scheme from the past 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.
Top 5 professional indemnity insurance claims made under ICAEW Members’ Scheme in 2023
1. Failure to follow filing deadlines
One of the recurring challenges faced by accountants is failing to meet filing deadlines. This can result in interest and penalties imposed by HMRC. These claims are often of relatively low value. However, the consequences can be significant for both the accountant and their clients.
The additional tax is often unavoidable. Which frequently shifts the focus of these claims to 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. Maintain a clear paper trail of all interactions.
2. Providing incorrect taxation advice
Claims arising from incorrect advice on taxation matters remain a persistent challenge. These claims often lead clients to incur avoidable tax liabilities.
Inaccurate guidance on the availability of tax reliefs can have serious consequences for clients. For example, errors regarding Entrepreneurs’ Relief can lead to significant financial repercussions. Advising against the premature transfer of shares before the sale of a company can help preserve 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 issues with material transactions during audits. Recent years have seen notable cases 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. Accountants should also consider the client's potential actions if that advice were 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 ongoing risk is the failure to properly prepare and file end-of-year accounts with HMRC and Companies House. This can lead to various penalties and complications for businesses. 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 about these common pitfalls, you can navigate potential negligence claims. Implementing proactive risk mitigation measures will also enhance the quality of your services.
What’s around the corner?
Let’s examine recent developments and claims trends that began to evolve in 2023. We are likely to see the following trends continue into this year.
Research and development tax relief claims
The Research and Development (R&D) tax relief scheme remains a vital mechanism for supporting companies in science and technology projects.
Throughout 2023, several changes to R&D tax relief were 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 led to heightened scrutiny and, in some cases, disputes over the validity of submitted claims.
These changes and increased oversight raise the potential for negligence claims. Accountants who provide inadequate advice on R&D tax relief matters are particularly at risk. The frequency of claims has already begun to rise across the market and is likely to continue.
In light of these developments, accountants must take proactive steps 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
Claims arising from audits have long posed a risk to accountants. However, 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 of this trend is the landmark case involving KPMG, one of the 'big four' auditors. The firm 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 deemed exceptional. This led to the highest fine ever 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 on 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 has made significant changes to its disciplinary framework. They transferred 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 put in place training around a particular area to relevant teams.
ICAEW introduced a 'lie on file' procedure for handling multiple complaints. This process pauses investigations into new complaints for members who have already been excluded. These complaints will 'lie on file' until a future application for readmission to ICAEW membership is received. Additionally, they have broadened the thresholds for interim orders to enhance public protection.
Professional indemnity insurance consultation
ICAEW’s Regulatory Board is consulting on proposed changes to professional indemnity insurance. The review aims to address the challenges arising from evolving firm structures and financial capacity. It also focuses on the impact of rising 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 from 18 October to 14 December 2023. It invited feedback from various stakeholders. Its aim was to balance public protection with a functional and affordable professional indemnity (PI) insurance market.
Take AIM and recognise your business risks
Marsh Commercial and ICAEW are pleased to introduce our new AIM Hub. An online tool offering resources and solutions to help you become more:
- Aware of business risks;
- Identify the specific risks facing your business;
- and provide content and solutions to enable you to better Manage those risks.
Talk to a PI insurance expert today
Find out more about ICAEW members’ PI insurance scheme by speaking to someone in our dedicated ICAEW team. Simply call 0345 894 4684 or send them an email. If you know what you need, you can buy online today.
Visit the AIM Hub
Helping members to be Aware, Identify and Manage some of their key business risks
Got a burning question?
Let us know what you'd like to learn more about, your question may help others too! An adviser will be in touch to answer your question shortly.
