INTHEBLACK June 2022 - Magazine - Page 47
SPECIAL ADVERTISING FEATURE
HOW TO PROTECT YOUR
PRACTICE WHEN A CLIENT’S
BUSINESS COLLAPSES
With a growing number of companies encountering financial
difficulty, the advice and services provided by accounting
professionals will no doubt come under the spotlight,
potentially giving rise to an increase in professional indemnity
claims. Is your practice adequately protected?
N
ow that COVID-19 government
support measures have ended, many
businesses are unfortunately (yet
inevitably) going into insolvency and facing
liquidation. Judging by the recent collapse
of several prominent organisations –
including Probuild, one of Australia’s largest
commercial construction companies – it’s
not just small entities that are vulnerable
to pandemic-induced closure.
Amid such uncertainty, public
practitioners not only have a duty to look
after the financial health of their clients,
but also to watch out for warning signs
that they’re heading down the path of
liquidation, warns Drew Fenton CPA
at Fenton Green. “If the financial health of
your client goes down severely, or they go
silent on you, that should ring alarm bells,”
he says, explaining that these are often the
first indications that a client’s circumstances
are about to change, to the potential
detriment of their advisory team. “When
a liquidator or receiver manager is looking
to wind up a business, they will pursue
anybody who they believe has given bad
advice to the company. An accountant
is the obvious target.”
HEIGHTENED EXPOSURE FOR
ACCOUNTING PROFESSIONALS
Throughout the pandemic, the risk profile
for accounting professionals has increased
exponentially.
Under pressure to navigate legislation
changes and a range of new government
schemes, practitioners may have made
errors, or given incorrect advice, which
may yet come back to haunt them.
Likewise, practitioners may have seen
a rise – and even been caught up – in
dishonest or fraudulent client behaviour.
Fenton Green offers professional
indemnity insurance for
CPA Australia members through
QBE Insurance (Australia) Limited.
Click here to find out more and to
apply for a quotation online.
“In desperate times, people do desperate
things,” Fenton says. “Are people prepared
to lie or manipulate to salvage their position;
to go to a bank and maybe alter a document
that you’ve given them?”
In this environment, professional indemnity
claims have become “a fact of life”, Fenton
says. “Circumstances change with your
clients; they get into financial difficulty and
they do things that may not be straight up
and down.
“From a risk perspective, the firm’s risk
profile goes up when dealing with clients
who are experiencing financial stress.”
MITIGATE RISK TO AVOID CLAIMS
While professional indemnity insurance will
cover any legal costs, client damages and
third-party costs that arise if a claim is made
against your practice (always subject to the
policy’s terms and conditions), Fenton says it
should be viewed as a last line of defence
– one that is best supported by a series of
risk-mitigation strategies.
First, he recommends maintaining a
professional distance from clients. If you’ve
attended board meetings, or are tight with
the owner or directors of a corporation, you
may be dragged into insolvency cases as a
member, rather than an arm’s-length
adviser. “As a shadow director or a director
of a company, you’re certainly not covered
under your professional indemnity policy,”
Fenton says.
Second, be diligent with record-keeping
processes. If a receiver, manager or liquidator
has been appointed to go through a client’s
books, they have the right to demand
information about any advice or services
provided by your practice. In the absence of
file notes and correspondence records, you’ll
have no evidence to defend your actions,
should a claim arise. “In times like these, if
your client is struggling financially, make sure
everything is documented as best as it can
be,” Fenton urges.
To ensure your practice’s defences are
fortified, Fenton suggests practitioners
regularly assess the extent of their
professional indemnity cover, as well as any
exclusions or restrictions that may apply –
giving you peace of mind that you’ll be
protected from the financial fallout of a
claim, regardless of the outcome.
intheblack.cpaaustralia.com.au June 2022 47