Four Risks to Watch in 2016
Contributed by: Kenneth J. Mackunis, executive vice president at Aon Insurance Services, Inc.
As accounting firms move through 2016, they will face a risk landscape that requires constant vigilance. Emerging risks will challenge firm leaders to get up to speed on new issues and regulations. Traditional risks will take on renewed importance and clamor for more attention.
While this risk landscape is vast, there are four risks that should be near the top of every accounting firm’s watch list for the year.
Reputation and Image Risks
Reputation is more valuable than just about any other asset an accounting firm possesses. After all, a reputation touches so many aspects of the business, from the services provided to the client roster to employee recruitment and retention, and more.
While reputation risks -- both internal and external -- have always been present in the accounting industry, there’s a major difference today. That difference is the speed at which information spreads, thanks in large part to social media, 24/7 news cycles and a growing citizen journalist movement. As a result, firms now only have a few minutes or hours to respond to a potential reputation issue instead of a few days.
“In the accounting world, your reputation is absolutely everything,” said Alvin Fennell, vice president, Aon Insurance Services, Inc. “It’s critical to have a structure in place to monitor for those risks and quickly address them. You can’t wait and hope that an issue will disappear -- because odds are it won’t.”
The AICPA Code of Professional Conduct is a valuable resource for firms looking to develop or enhance a reputation risk management strategy. The code even includes a conceptual framework for how a CPA should proceed when there’s no established guidance for a situation.
Increasing Complexity of Firm Management
Now, more than ever, firm management needs to stay abreast of a broad array of issues. New regulations regarding how firms perform services as well as how they treat and compensate their employees continue to evolve. Niches have emerged, tempting firms to expand into new areas of practice or industries. Cybersecurity and big data have become a part of everyday vocabulary. And social issues have reshaped how firms recruit and retain their employees. For example, today’s firm leaders must be aware of religious, LGBT, and generational matters, among others, as they interact with employees and consider internal policies.
“There’s simply no way one person or one leadership team can effectively keep tabs on all of these issues,” said Ken Kumor, senior vice president, Aon Insurance Services, Inc. “You need to create a network to help you monitor relevant events and understand the potential impact to your firm.”
The AICPA’s practice management section is a good starting point, offering a wide range of publications from a complete business manual to short bulletins on relevant breaking news items. Larger firms are hiring general counsel to navigate the changing landscape. Due to this growing complexity, having sufficient employment practices liability insurance and/or management liability insurance for your firm is more important than ever.
If this route appeals to your firm, remember that providers offer different levels of coverage and benefits with their policies. Many programs provide pre-claim assistance through risk management updates or even access to dedicated employment practices legal counsel, so do your homework before choosing an insurance partner.
Accounting firms face cybersecurity issues from all sides. They are constantly fending off hackers who always seem to be one step ahead of the latest security patch. They have to deal with employees who inadvertently expose the firm to threats by leaving a laptop behind or clicking on a malicious link from a company computer. And they have to worry about their vendor’s security, which can directly impact their own.
“Accounting firms are an incredibly attractive target for hackers because of the volume of confidential data they have on file,” said Kumor. “And this is not just an issue for big firms. Small and mid-sized firms get hacked just as often as their larger counterparts.”
Anti-virus software should be just one layer of a firm’s cybersecurity strategy. Employee education, vendor security evaluations, Bring Your Own Device (BYOD) policies, cyber liability insurance and more are all tools that can enhance the strength of a firm’s cybersecurity efforts.
Failure to Clearly Define Scope of Services
It seems so simple, but not clearly defining the scope of services continues to cause serious issues for accounting firms. In fact, about 40 percent of the professional liability claims of the AICPA Professional Liability Insurance Program each year involve a disagreement about the scope of services. So how can a firm mitigate this risk? It comes down to one simple word: documentation.
“We advise our clients to document everything -- from scope of work to informal business conversations,” said Fennell. “If it’s not documented, it’s simply not defendable.”
The first step in any new client relationship should be an engagement letter that clearly outlines the scope of service, the client’s and firm’s respective responsibilities, limitations of service, fee and payment terms, dispute resolution, and termination provision. But remember, writing that initial engagement letter is just the beginning. Teams should revisit it often to ensure they are always within scope and update it any time the relationship changes.
Other types of documentation are also critical to preventing a scope of services dispute. Client memos and follow up emails are good documentation tools when they are thoughtfully written, including such key details as who was present during the conversation, when and where it took place, and a high level overview of any decisions made.
Visit www.aicpa.org/insurance for more information on the AICPA Member Insurance Programs.
Kenneth J. Mackunis (firstname.lastname@example.org) is an executive vice president at Aon Insurance Services, Inc., the endorsed provider of the American Institute of Certified Public Accountants (AICPA) Professional Liability Insurance Program since 1974. Aon Insurance Services, Inc. is a trade name for Affinity Insurance Services, Inc. For more information call 800-221-3023 or visit cpai.com.
This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice, You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.