The time it takes to discover a mistake, error or negligent act can vary hugely. For an accountant, this can range from failure to complete tax returns – which can result in the client incurring interest and penalties – to failure to discover fraud due to inadequate audit or monitoring procedures.
Failure to complete or late tax returns are usually discovered quite quickly at the point when the work was done. However, fraud claims can take a lot longer to discover, usually because the perpetrator is adept at disguising the trail of payments.
A recent case saw an accountant employ a bookkeeper who was found to be defrauding both the employer and clients of the accountancy firm. The bookkeeper – who was a longstanding and trusted member of staff – had been creating multiple fake invoices and payroll entries that were paid directly into the bookkeeper and the family bank accounts. The fraud was discovered in 2017 after a client appointed a new bookkeeper who became suspicious. After a lengthy investigation by both the police and a forensic accountant it was found that the fraudulent transactions had started as early as 2006. The investigation was ongoing for three years and the matter finally settled in 2021. The bookkeeper received a prison sentence of three years.
Another claim arose from the calculation of holiday pay; the accountant found that there was an error in their basic calculation for a number of firms they prepared payroll for. This was brought to light in April 2020 when the legislation changed, and when the accountant was implementing the new requirements into their processes and procedures, they realised that the previous calculation was wrong and holiday pay had been underpaid for the previous three years. In this case due to the nature of the error it was swiftly and easily quantified; however, tracking down all the employees who had been underpaid took over a year!
Claims discovered quickly have the potential to be rectified. However, social engineering fraud claims – where money is wired to an imposter purporting to be the client – can be difficult to mitigate in terms of retrieving the funds, as they are often swiftly transferred to multiple accounts overseas, never to be seen again.
It is not only the time taken to discover that a mistake has occurred, the investigation into and defence of the loss can often be protracted due to circumstances such as
- claims which arise years after the fee earners have left or from work no longer carried out by the firm, can be particularly difficult to defend
- attendance notes or files are destroyed or lost
… all mean firms/insurers are left struggling to defend themselves.
Claims arising from work undertaken by predecessor firms which have been acquired can be even more challenging to defend and highlight the importance of carrying out thorough due diligence when looking to acquire another firm. Firms should consider, for example, a sample of files from different departments and include a selection of closed files as well. Were the files closed after completion of a standard file closure check list?
Firms should always consider what an appropriate limit of indemnity should be for work undertaken not only now, but in the past – in this instance for ACCA members, it is important to follow ACCA’s minimum PI requirements when deciding on the appropriate limit of indemnity.
If you held a higher limit of indemnity in the past and are looking to decrease it in the future, it is important to consider the potential consequences if a claim were to arise for the higher limit of indemnity – for example, if you reduce your cover because a project or piece of work has been completed and you feel you no longer need the higher level of cover, please keep in mind that due to the claims made nature of professional indemnity insurance, the lower limit of indemnity will now apply if a claim arises, not the level you purchased when undertaking the work at the time.
Daniel Vien – account manager, Lockton Companies
In partnership with Lockton, ACCA is running a series of webinars in 2022 on risk. The first one on anti-money laundering and the risk to your insurance cover is now available on demand.
The second webinar will take place at 12.30pm BST on 15 September on the topic of Engagement letters and the risk to your insurance cover. Register to join us live or watch later on demand.
If you have any questions about professional indemnity insurance, please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com.
Lockton is ACCA’s recommended broker for professional indemnity insurance