If your accountancy practice was to have a claim made against it by a client alleging you have made a mistake or been negligent with regards to advice or services you have provided, this is when your professional indemnity insurance would be invoked. Whether or not the claim is valid, having to defend your business against a claim can prove to be very detrimental, and also stressful.
This was highlighted by the case of Integral Memory PLC v Haines Watts  http://abytx.co/1jcDnDN. The accountancy firm, Haines Watts, had promised to advise their client of any changes in the law or legislation if it affected them. They had been originally retained to provide tax advice in relation to a discretionary bonus scheme, the aim of which was to make savings in national insurance contributions for the company. Haines Watts said the scheme would be advantageous until the point of there being a change in legislation, and they would inform the client of when that happened. Despite this assurance, there was a change in the law in 2003 which negated the benefits of the scheme. This only came to light after the company sought further advice in 2009, and ended up having to pay over £100,000 back to HMRC; an amount they hadn’t anticipated.
For reasons not known, the company didn’t issue the negligence claim until 2011. As claims for negligence must be made within six years, the accountants argued that the claim was invalid. However, Integral Memory argued that the accountants had a continuing obligation to advise them of a change in the law, so they could review their tax affairs. The judge rejected this argument and said the duty to advice should have been made in 2003, when the new legislation was introduced. So, despite the fact that Haines Watts had seemingly breached their duty, the time limit on the claim had run out, so the company were unable to recover their losses.
There are several main points to take away from this case. First and foremost, accountants, tax advisors and financial advisors should remember to notify clients of any changes in the law if they have promised to do so. Secondly, companies and individuals should schedule regular reviews with their advisors to check that any financial arrangements in place are still beneficial to them. Lastly, it’s vital to seek legal advice straight away if a company is considering a claim for negligence. Cases can only be awarded and compensation given if complaints are lodged in a timely manner.
More recently, the High Court has ruled that a West Midlands accountancy firm was negligent, and awarded £1.4m in damages. In the case Mehjoo v Harben Barker  http://abytx.co/1e0hZKE, the High Court found that Harben Barker had been negligent in failing to advise their client that he could transfer his business to an offshore trust, so that he could sell the company without paying £850,000 in capital gains tax. Mr Mehjoo could have used a bearer warrant scheme to reduce his liability, but his accountants, who were not tax planning specialists, were not aware of this. Mr Mehjoo argued successfully they should have referred him to another firm with expertise in this area. In fact, the Court drew comparisons with the duty of a GP doctor to refer a patient to a specialist, when the ailment is outside his field of expertise.
The important lesson in this example is not to provide advice if you have insufficient knowledge. Accountants should seek more specialist counsel on matters they are less experienced in. If the client does not wish their advisor to do this, a signed disclaimer stating this requirement would be prudent.
Sage recently caught up with John Davies who is the Head of Technical at ACCA.
Is having indemnity insurance a requirement of having ACCA accreditation?
Any member of ACCA who wishes to engage in public practice, or is offering accountancy and related services to the public, is required to take out professional indemnity insurance; this is intended to ensure that the public is protected should the accountant perform negligent work which causes loss to the client.
Has the number of negligence claims risen over the last few years? If so, why?
Surveys have suggested that the incidence of negligence claims against professional firms generally has been rising in recent years. This may be due to the economic climate, or perhaps it is a symptom of the more litigious character that the UK appears to be assuming. But any rise in claims, whether or not they are upheld, are likely to be reflected in insurance premiums.
Is this an issue that accountants are becoming more concerned about?
For obvious reasons accountants, especially auditors, are concerned about this issue; this explains why the larger firms have all now become limited liability partnerships (LLPs). Unlike the situation with a traditional partnership, if an LLP is hit with a catastrophic claim and becomes insolvent, the personal assets of each of the LLP’s individual partners are not at stake. This being said, the courts have over the years pursued a careful line as to the extension of negligence responsibility to auditors, and while the situation is always capable of changing, there is currently a settled line as to the circumstances in which an auditor becomes liable.
What else can accountants do to try and protect themselves from negligence claims?
The LLP offers them a legal structure which shelters the assets of ‘innocent’ partners from any negligent conduct that might be engaged in by an individual member of the firm. But the best long term answer is to ensure that the firm as a whole is committed to performing quality work – partners and staff should be properly trained and show sound judgement and the firm must follow all relevant legal requirements and technical guidance and put in place effective quality control measures.
Author: sage – sage focuses on supporting accountants in practice and their clients, by providing a wide range of products and services that help in the day-to-day running of a successful business.
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