McGowanPRO Professional Liability Blog / Resources / Articles

We frequently receive questions from individuals who have been asked to, or are currently acting as, a Trustee. The most frequent question is in regards to coverage for these services under their (accountants) professional liability policy.

Although each policy form is different, it is our opinion that most accountants professional liability policies intend to provide coverage for an accountants professional services as a Trustee.

Read more about the potential exposures created by acting as a Trustee and specific Risk Management steps you can implement. 

We regularly hear from accountants who ask about the effectiveness, and enforceability, of “negative engagement letters”.

A Negative Engagement letter is one that includes wording that indicates even if the client does not sign the letter, certain action taken by the client (submission of tax returns) will be deemed as acceptance of the engagement letter terms.

We spoke with Ralph Picardi, Esq, specialists in Accountants Professional Liability, and received the following insight on negative engagement letters.

A signed engagement letter is by far the best course of action in any engagement.  By obtaining the client’s signature on an engagement letter, the firm creates a clear contract with the client including all of the important terms of the engagement.  Most firms, however, have a very difficult time receiving back completed organizers and sufficient source documentation, let alone signed engagement letters in 1040 engagements. 

To address that concern, many firms have opted for negative letters, i.e., letters that do not require a signature.  They can take many forms.  Attorney Picardi clarified that every state recognizes that contracts can be formed by something other than a signed writing.  Oral contracts and those formed by actions are examples.  In the absence of a state law requiring a signed writing (and you should check this with local counsel), the reasonableness of the communication will probably control the matter if litigation ultimately ensues. 

Attorney Picardi further recommends the following approach.  The firm should continue to style its engagement letter to be signed by the client, but should also include language that purports to make the terms of the letter binding even in the absence of a client signature.  Example language would be as follows: 

If you agree to authorize this firm to prepare your 200_ personal income tax returns pursuant to the terms set forth above, please execute this letter on the line below designated for your signature, and return the original of this executed letter to this office along with a completed copy of the enclosed tax organizer and the supporting documentation requested therein.  You should keep a copy of this fully executed letter for your records.  If this firm does not receive from you the original of this letter, in fully executed form, but receives from you a completed copy of the enclosed tax organizer and/or supporting documentation requested therein, then such receipt by this office shall be deemed to evidence your acceptance of all of the terms set forth above.  If, however, this office receives from you no response to this letter, then this office will not proceed to provide you with any professional services, and will not prepare your 200_ income tax returns.

Negative engagement letters may not be the best, but they are useful and are certainly recommended over no engagement letter at all.

For more information, visit NAPLIA's dedicated website to engagement letter education,

www.cpaengagementletters.com

If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if;

• The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country and
• The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

The IRS has announced a new 2011 Offshore Voluntary Disclosure Initiative that runs through Aug. 31, 2011. For more more information about the special the 2011 initiative, visit (2011 OVDI landing page). For questions and answers about the 2011 program, visit (FAQ page link)

Read more including sample engagement letter wording, www.naplia.com/fbar

On Nov. 22, 2010, the Internal Revenue Service sent out more than 10,000 letters to tax return preparers nationwide to remind them of their obligation to prepare accurate tax returns on behalf of their clients. The letters were sent to a pool of paid preparers who complete large volumes of tax returns with Schedules A, C or E.

During the 2011 filing season, IRS representatives will visit approximately 2,500 tax return preparers who received these letters to further discuss their responsibilities as a return preparer and to verify their compliance with existing return preparer requirements.

Read about potential exposures and response to protect yourself if you have received such a letter.

President Obama has signed into law S. 3987, the Red Flag Program Clarification Act of 2010, which exempts accounting firms and other businesses from the Federal Trade Commission's "Red Flags" rules set forth in the Fair Credit Reporting Act.

The exemption is a victory for the American Institute of CPAs and the state CPA societies that sought to relieve CPA firms of the unwarranted requirements, as CPAs are already subject to confidentiality requirements.

The text of S. 3987 can be found at:
http://www.gpo.gov/fdsys/pkg/BILLS-111s3987cps/pdf/BILLS-111s3987cps.pdf 

According to an article in the LA Times today, the economy grew at a 3.2% annual rate in the last three months of 2010, driven by stronger consumer spending and trade, the Commerce Department reports. Economists expect the recovery to pick up momentum this year, though a shadow still looms over employment.  Read full story

Despite pessimism over the impact of the economy growth on employment an analysis of professional liability applications over the past 4 years shows noticeable improvement in hiring in the Accounting industry.

Accounting professional staff counts from professional liability applications received through NAPLIA:

2006  - control

2007 - moderate growth from 2006

2008 - significant decrease from 2007

2009 - flat

2010 - significant improvement back to 2007 numbers

Although not a scientific study, employment in the Accounting industry can be measured through insurance applications.  Our experience is that the Accounting industry is seeing a recovery and we expect that employment rates in the industry will continue to rise through 2011.

“Information Security” will be a term that you begin to hear more frequently.  And, as an individual and professional, it is something you should start seriously thinking about this year.

Personal Identifiable Information (PII) has become as valuable as cash, and it is important to understand how to protect your own PII, as well as, any PII that you collect from your clients.

As an Individual

PII generally consists of any information that is unique to you and includes social security number, license number, credit card numbers, bank account numbers, and others.  Having any of this data compromised can cost you financially, as well as, a significant amount of time.  Some steps you should consider to safeguard this information include:

1. Get a free credit report.  By law, the three major credit-reporting agencies will provide you with a free copy of your credit report once every 12 months.  https://www.annualcreditreport.com/cra/index.jsp
2. Take the time to start to manage your identity.  Understand who has your information.  Your personal information can be broken down into three key areas:
   1. Financial data
   2. Medical records
   3. Public documents

As a Professional

Your professional responsibility for the protection of your client’s PII is increasing.  The Red Flag Rules were finalized in 2010 and are now law.  Even if you do not feel the Red Flag Rules technically do not apply to you by definition, it is important to understand what steps you can take to protect your client’s information

1. Identify relevant red flags.
2. Establish procedures to detect those red flags in your operations.
3. Prevent and mitigate identity theft if you spot red flags.
4. Update your program regularly.

For more information visit, http://www.naplia.com/redflags/

What to do if you have a Data Breach

Finally, what if your client data is compromised?  NAPLIA has compiled information, including links to all State Security Breach Notification laws on our website, http://www.naplia.com/resources/identity_breach.shtml

Visit NAPLIA’s Resource page for more information on topics relevant to your business.

http://www.naplia.com/resources/index.shtml

As the New Year approaches so does Tax Season for our CPA clients.  One of the consistent issues that arise for CPA’s at this time of the year is the question of utilizing engagement letters for tax clients.  Some CPA’s feel that requesting their tax clients to sign engagement letters is burdensome and may appear ominous to some clients. 

The professional liability (errors & omissions) insurance market has always been cyclical.  In other words, the market will go for a few years with excess capital which means low premiums and an abundance of carriers offering coverage to accounting firms.  However, the capital eventually dries up and those carriers who were looking for a quick profit drop out of the market, leaving fewer carriers, tighter underwriting restrictions and increasing premiums.

2010 was an “extended” soft market for the accountants (and other) professional liability market.  The tightening of capital and low investment returns for insurance companies was over shadowed by the recovering recession.  The market continued to be soft despite economic indicators that would typically reflect a hardening market.

For 2011, we are starting to see some signs that the hard market may eventually come.  Keep in mind, we’ve inaccurately predicted this before.

However, here are 3 specific signs that lend us to believe the hard market is coming:

1. Economy is improving.

According to the Commerce Department, the economy grew at an annual rate of 2.6 percent in the third quarter of 2010, a touch above its earlier 2.5 percent estimate.  Many forecasters expect gross domestic product to continue to expand at a 3 percent to 3.5 percent pace in the fourth quarter.  A separate report from the National Association of Realtors showed existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace, the highest since June but a still-depressed level that was slightly weaker than expected.  Surprisingly, an improvement in the economy allows insurance carriers to improve their investment income and demand more underwriting profit.

1. Carriers look to get off sub-standard accounts and take premium.

We have seen an increasing trend of professional liability carriers electing to non-renew accounts that just a year ago they were willing to take a chance on.  In addition, subsequent to those carriers that have filed formal rate increases, underwriters are being stingier with applying available premium credits.

1. The New York Attorney General sues Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud”

In the property & casualty business they have hurricanes and other natural disasters to harden the market.  Ernst & Young might just be the hurricane of the accounting professional liability market that pushes carriers to finally tighten up their pens.  You can read more about this story here, http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?scp=2&sq=lehman%20brothers&st=cse

In general, no one can predict exactly if the insurance market will harden, or to what extent.  But, there are definitely some signs on the horizon.  In our next blog, we’ll discuss ways your firm can prepare.

Social media can be a valuable tool for investment advisors to reach new client audiences and network with colleagues, but only if you know how to use it right. NAPLIA will be a featured speaker in fi360’s upcoming Webinar on building an effective social media program, understanding the liability and exposure associated with social media and complying with the latest regulatory guidance.

Date and time: Thursday, December 2, 2010 from 4:00-5:00 p.m.

Presenters: Jessica Weiner, Founder of Value Quotient, Tom Henell Chief Marketing Officer of NAPLIA and Kristina Fausti, Director of Legal and Regulatory Affairs of fi360

REGISTER HERE  (https://www2.gotomeeting.com/register/537072218)