The Custodian Insurance Industry Blog

June 3, 2020

COVID Insurance Risks to Accountants

In a time of great uncertainty, one thing we can say is that the risks of claims and regulatory investigations will not decrease for your industry. Having said that, although there will be difficult times, we are not predicting Armageddon for the accountancy sector. In fact, there will be some areas of increased work. We have considered the impact of COVID-19 on the three main areas of exposure that are normally of concern to Insurers and highlighted some COVID-19 specific new areas of claim.

Civil claims – expect more cases of fraud to be uncovered in these times of financial turmoil, with a potential increased risk of fraud perpetration.

The main generator of civil actions is fraud. For auditors, a failure to spot fraud, and thus stop or thwart it, can lead to claims. Your position as corporate watchdogs (in the literal sense) and duties imposed under auditing standards make you an easy target. When fraud is not uncovered, your duties come under scrutiny and alleged breaches will found the legal basis of a prima facie claim. Recession, loss of revenue and financial turmoil are well known to bring ongoing frauds to light, so in the short term we expect more claims to arise.

Will the COVID-19 epidemic make fraud more likely? Possibly. Any financial distress may encourage desperate, illegal steps by management looking to avoid financial ruin. However, the effect may only be short term – it remains to be seen how long corporates with flawed or coronavirus damaged business models can continue trading and pose a risk for their auditors.

Tax advice claims – flawed tax advice claims will continue much as usual and a renewed focus by clients on their tax positions is likely in the post COVID-19 world.

We suspect that this will be an area of ‘business as usual’ and predict little change in claims relating to tax advice. The ongoing problems caused by flawed tax advice linked with tax schemes (which HMRC do not like) will remain. Similarly, the risks of giving negligent advice on current tax structures and individual tax saving models will continue. If anything, with income for most declining, tax advice may take a backseat to other business imperatives in the short term.

Looking forward to a post COVID-19 world, there may be an impact when your clients take a fresh look at their tax positions.

Regulatory – accountants may face criticism if no qualification to accounts.

It is difficult to predict the regulatory impact as there are no metrics to measure the current situation against. Further, legislation is being passed that changes the normal exposures to claims. For example, the wrongful trading suspension. Moreover, if there are corporate failures, they will be a heavy mix of COVID-19 driven revenue collapse and struggling business models (particularly in the retail sector).

Going concern issues are the most relevant and affected of accounting measures to be tested and scrutinised. In the current climate, as an auditor, you will almost want to default to a qualification of the accounts on this issue. If you do not put in such a qualification and the company then fails, you might face criticism from the regulators. However, being an obvious point, we doubt that you would make this error.

Regulatory – FRC’s attention will be diverted if the expected large corporate failures arise.

If there are several large corporate failures, the Financial Reporting Council’s investigation teams will be kept very busy indeed. Significant defence cost bills for dealing with these investigations will be incurred. An indirect impact may be a reduction in the regulatory pressure on small accountancy firms that audit PIE’s and are therefore exposed to FRC investigations.

Coronavirus Act 2020 – HMRC powers to be extended on a temporary basis.

Section 76 of the Coronavirus Act 2020 gives HMRC “such functions as the Treasury may direct in relation to coronavirus or coronavirus disease.” “Functions” is not defined, but it is understood that the purpose here is to enable HMRC, on a temporary basis, to effectively manage the tax process only during furlough and not beyond.

COVID-19 specific claims – new areas of claim for failure to properly advise on new tax reliefs and grants, with related risk of claims of failing to identify tax relief abuse.

In the short term, there are likely to be some COVID-19 specific new areas of claim. There is the potential for misuse of the Coronavirus Job Retention Scheme’s tax reliefs, grants and VAT deferrals by businesses. HMRC has said that the “Government will retain the right to retrospectively audit all aspects of the scheme with scope to claw back fraudulent or erroneous claims.”

We can expect claims to arise from the failure to identify tax relief abuse. Similarly, we can also expect to see claims for accountants’ failure to properly advise on these reliefs. The reliefs have been rushed in and HMRC’s rapidly prepared guidance may contain ambiguities or loopholes, so do be extra vigilant when providing advice.

Practical implications – new way of working will require new strategies to cope with logistical problems such as no access to company sites.

COVID-19 is, of course, having an impact on the way we work. This applies equally to you, the accountants. For example, as an auditor, you may not be on site at a client’s premises and may therefore be unable to check matters such as stock levels against the client’s records. New ways of dealing with these types of issue will need to be found.

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