Claim Statistics Review:
Over the last 20 plus years, claims against accountants have, in many ways, stayed the same.
Tax claims still represent over 50% of all claims.
The largest dollar claims involve “failure to detect” which includes theft, fraud and deliberate misstatements of income or expenses.
However, when you review claims statistics sometimes certain trends or percentages stand out.
- Tax Services
Improper tax advice or treatment:
- Individual 55%
- Corporate 61%
One interesting trend, math errors are down from 10% to under 5%
75% of claims come from the failure to detect theft, fraud, misstatements of revenue and/or expenses
About 25% of audit claim errors are in reports issuance or are classified as other.
Failure to detect accounts for more than 60% of all claims
Failure to detect accounts for almost 70% of all claims
5.) Bookkeeping (BK)
25% of all BK claims come from failure to detect fraud or theft.
Just under 10% of claims come from theft by the CPA Firm.
6.) Personal Financial Planning (PFP)
Not surprisingly, 71% of PFP claims result from improper advice or product sales, but 6% of claims involve theft by a CPA at the firm.
7.) Trustee and Non Trustee Services
About one third of the time (33%) claims relate to breach of fiduciary duties. The most difficult breach of fiduciary claims are were the agreement or engagement is not well delineated or established.
Higher Risk Areas
Insurance Companies that defend accountants’ claims usually have areas of practice or practice concerns that they consider higher risk, and these change over the years. The services currently considered higher risk are:
- Business valuations
- Professional services for entertainment clients “A” rated*
- Non Trustee clients that have significant investment components
- Firms with very weak internal controls for data breach and data compromise
*“A” rated clients are considered to be clients that pay greater than $250,000 in annual fees.
Insurance companies may ask additional questions in these areas and may consider premium adjustments.
Business valuations, where CPA’s have addition designations continue to have far fewer claims than firms that provide the same services without.
Suit for fee claims continue to decline as accounting firms now know the inherent risks of these actions. It is a tough decision, you have done the work and the client refuses to pay….Just remember that 50% of the clients that are sued do countersue the accounting firm.
In the last 16 years we have seen several thousand claims, potential claims, and subpoenas. Some may say we have seen everything including the kitchen sink for alleged damages.
However, sometimes even we are surprised the accusations:
Claim 1.) The cocaine dealer sued his accountant for their failure to advise him that his activities were illegal and that he was supposed to report his illegal income on his tax returns.
Claims 2.) The business “cash” client who alleged that his accountant taught him to only make cash deposits under $10,000 to avoid detection.
Claim 3.) The client who lived in a 17 room home with water views, had several expensive cars and huge travel expenses while only declaring income of under $50,000, claims his accountant show have known and advised him “to be careful”.
In conclusion, although claims statistics percentages haven’t changed significantly in the last twenty years, some statistics do stand out. Failure to detect claims in review, compilations and bookkeeping are eye opening. When asked who steals in the CPA firm, our answer is most often, the partner/owner, very rarely is it an employee of the firm. One other tread is that the CPAs who have worked in their profession 12 more or years are more likely to be sued then less experienced accountants.