Takeaways from Professional Liability Underwriting Society (PLUS) International Conference 2016:
1. Law firms fail because of: too much debt, rapid expansion, guaranteed salaries, and/or cultural divides.
2. We are all expecting a U.S. law or accounting firm to get hit with a Panama Papers style data breach which brings down the firm and probably yields management liability claims as well.
3. The IRS will continue its attack on captive insurance companies utilized to avoid tax with no real risk transfer.
4. Mary Jo White will be missed and you might expect the SEC to focus less on Wall Street and more on Main Street in the next four years.
Just last week the ABA’s Standing Committee on Lawyers’ Professional Liability (LPL) released its Survey of Legal Malpractice Claims 2012-2015. Items of note include:
1. Total legal malpractice claims increased by 20% from the 2012 survey. This might appear to be a big increase but it looks small when you read on.
2. There was a huge increase in the number of claims in which claimants received over $1 million. There were only 52 such claims reported in the 2011 study but there were 440 such claims reported in the 2015 study for more than a 700% increase. Perhaps you should check my math, as a lawyer with a calculator is a scary thing; nonetheless, we should all check our limits and make sure we have enough coverage in a world of big dollar claims.
3. Total real estate claims dropped 21% when 2015 is compared to 2012. This is true despite the fact that commercial real estate transactions have increased during that time and many commercial real estate lawyers are experiencing the best of times. Not many real estate deals are failing and that helps keep the pressure off the lawyers who do the deals.
4. 46% of the claims arose from administrative errors, client relations or intentional wrongs. While this is a slight reduction from prior surveys, it still emphasizes the importance of basic blocking and tackling.
- Keep your administrative machine running smoothly, return client calls, be nice, don’t intentionally hurt your client, and your E & O risk is cut in half.
- The seamless web of the law is vast and can’t be perfectly understood by any of us. Let’s all do the easy stuff and reduce our risk dramatically.
5. Claims against bankruptcy and collection lawyers have only dropped off about 4% from the 2011 study to the 2015 study. Despite the precipitous decline in consumer bankruptcy filings, commercial bankruptcy filings are said to be on the rise and so are claims against the lawyers involved.
The Standing Committee puts out the Profile on Claims every third year and also sponsors two great conferences annually. If you are interested in getting involved in our work feel free to reach out to Joe Kingma or just say hello at our spring meeting in Boston.
I was fortunate to prevail in a bench trial for a great CPA firm in August and was reminded of these takeaways:
1) A CPA’s work product will seldom be perfect but good workpapers can save you from many apparent sins.
2) Identify sources of data in your work product or you may end up as guarantor of data you should not be responsible for.
3) Smart and highly educated Plaintiffs who exaggerate their claims can be systematically destroyed, but only with a light touch.
4) Credibility and likeability are critical in a factually complex case and lawyers and CPAs need to begin to establish both on day one of their engagement.
5) Our trial system is not perfect, but it often yields the right result so defendants should not despair.
Fighting For Your Professional Life: Accounting and Attorney Malpractice
Defamation claims against lawyers and accountants are on the rise, as noted in the recent Carlock, Copeland & Stair Accounting Risk Management program in Atlanta. That point was highlighted recently when a forensic accountant was sued in Fulton County, Georgia. The facts are complex, but the plaintiff was involved in a failed bank and sued over an allegedly negative reference in a national publication. Accountants and all professionals need to be careful what they say, especially in the press.
Five Takeaways from the Carlock Copeland & Stair Accounting Risk Management Program Presented on May 19, 2016
1. The Panama Papers, and Big Data in general, demonstrate the risk posed for accountants when clients hide or launder money offshore. An international consortium of major news sources is actively soliciting more leaks and tax officials from 28 countries met in April to plan a joint strategy to mine the Panama Papers for gold. The database lists many U.S. CPA firms and diagrams their relation to various suspect transactions. Governments from Russia to Britain to Argentina have been rocked by the disclosures. Don’t get your firm’s name added to the list and avoid overly aggressive strategies. Protect your own files from those who might like to steal your clients’ confidential information.
2. Professional judgment is what you get paid for, but can also be what you get sued for. Audit engagements in particular require lots of judgment calls. Make sure your firm’s work reflects good judgment and that those who make the judgment calls are properly trained and professionally skeptical. If you have young auditors in the field without onsite partner supervision, talk through the tough issues with them in advance.
3. Read your insurance policies. Policy provisions may be negotiable and you may gain value in ways beyond premium reductions. Be very accurate when filling out your application and compare it to your website. Submitting a neat and accurate application can save you real money. Price should not be your only consideration and you should check to see which carriers treat their clients well.
4. Jurors hold outside accountants to high standards when a client suffers from internal fraud. Take another look at your engagement letters to make sure you have included all the damage limitations and disclaimers the laws allows and avoid engagements where the client’s lack of internal controls creates too much risk.
5. Accountants are getting sued for defamation even when they make statements in good faith and in the course of their clients’ engagements.