Benign. Soft. Recession proof. Some words commentators (including myself) have used to describe trends in accountants negligence claims before and after the recession. However, my view is that this landscape is going to change quite quickly over the next ten years and the days of most small firms being seen as low premium and low risk are numbered.
I accept that is a big claim. In fact, the signs from the market are that this is still a relatively benign claims landscape for accountants and the majority of claims, by way of volume, still arise out of tax, general accounting, audit and advisory work. Of course, this is a generalisation across a diverse profession where the majority of accountants still practise in small partnerships on the high street dealing with general accounting such as payroll, tax returns and advice to small businesses. The work those firms do is light years away from the highly specialised advisory and consultancy work carried out by the top firms. As are the claims which result from such work.
Focussing on those smaller firms, the vast majority of claims we deal with are pretty consistent with those we’ve been dealing with for years. So in some respects, you might think the underlying claim trends have barely evolved at all. For example, I travelled recently with a colleague to see a small practice in the West Midlands to interview an accountant about a claim arising out of his preparation of VAT returns. The claim was for penalties and interest levied by HMRC.
The main battle lines centred on whether the insured had assumed responsibilities outside their written retainer. There was nothing remarkable about the claim nor the type of work from which it had arisen. It simply mirrored so many we have dealt with over the years. In fact having talked to many partners at smaller firms across the country since the recession, it is perhaps surprising how little seems to change in the type of work they are doing and how they are doing it.
But these experiences shouldn’t mask the fact that there is significant change happening out there for professional services firms, largely driven through technological innovation such as artificial intelligence (AI) as well as regulatory and compliance burdens. Combined with ever increasing incidents of innocent and malicious data breaches, I expect we will see an evolution in the types of claims being pursued against accountants.
Looking at the impact of technological change, there has been some interesting research by Thompson Reuters on the future of accountancy. In a recent survey, 96 per cent of accountants expected technology to change their roles by 2028, with cloud computing and real-time data having the most impact. In particular, accountants expect many areas of general accounting to become largely automated in the next ten years including accounts preparation, book-keeping and tax-returns. Nearly 50 per cent expect the high street to shrink, with firms being forced to change their business models and focus on advisory and complicated tax work.
If one effect of AI is that firms will focus more heavily on advisory work, what does this mean for risk and professional indemnity claims? The bulk of accountants' firms have for years been seen as a safe risk by insurers, largely because accounts preparation, book-keeping and tax returns are relatively low risk, and this has fed into low PII premiums. However, the key practice areas which tend to generate more claims are tax and commercial advisory work. AI will bring opportunities for growth and efficiencies, but it will be interesting to see how these changes will impact on premiums and the appetite for risk.
The flip side of the coin is that technological change will drive efficiencies and reduce mistakes – reducing claims from these lower risk areas. If we go back to my VAT case at the start of this article, while it seemed the same old type of claim, in fact it was a dying breed because, as the insured informed us, it could never happen in the future because the client was completing returns on a live time basis themselves.
So if we are likely to see more claims arising out of advisory work, we are also likely to see lots more as a result of cyber/data breaches. As firms and their clients become more reliant on technology (especially cloud providers and online filing) both accidental and malicious breaches will increase. You might think that if the likes of British Airways, Morrisons, and Deloitte cannot prevent serious data breaches (who you’d expect to have sophisticated IT systems), there is little hope for the high street firm.
This threat greatly affects accountants. They are entrusted with some of the most sensitive client personal information such as financial/investment data, personal and business income, ID, etc. Loss of data is immediate and can lead to a whole host of third party claims some of which will be covered under the ICAEW minimum terms. Some losses (such as first party claims) simply won’t be covered and firms will need bespoke cyber policies.
So back to my big claim that accountants’ risks are changing. A lot of the claims we handle for accountants aren’t going anywhere and we will see them for many years. The day of the local high street firm doing book-keeping and annual accounts isn’t over but it will need to evolve to survive. However, I suspect in ten years’ time the claims landscape will look quite different and it will be saturated with advisory based claims and those arising out of data breaches/frauds. Those are the claims of the future and that future is round the corner. In fact it’s probably not such a big claim after all.