The conventional insurance company approach is to discourage policyholders from reporting problems by providing premium credits for "claims-free status," thereby encouraging policyholders to handle potential claims on their own – a dangerous practice with potentially disastrous financial and reputational consequences for a CPA firm.
CAMICO has always taken the opposite approach: Encourage policyholders to report early so that disputes and potential claims have a better chance of being resolved early, enabling the firm to avoid time-consuming troubles and remain focused on servicing their clients.
CAMICO was the first insurance company to devote an entire department to Loss Prevention, in addition to a Claims department, to provide the best protection program for CPAs. CAMICO’s Claims and Loss Prevention departments continue to work in tandem with policyholders to find new ways to help CPAs avoid disputes and better service clients.
Consider the following statistics:
- CAMICO’s Claims department handles about 2,000 calls each year on new matters such as subpoenas, regulatory requests for information, potential claims, and claims.
- The Loss Prevention department handles some 7,500 calls each year from CPAs seeking expert guidance and opinions on problems, questions and best practices. About 1/3 of the calls received by CAMICO concern issues that could become claims.
- The Claims department keeps about 75% of potential claims from becoming actual claims. To date, Claims specialists have managed more than 15,000 incidents that could have led to claims.
- 100% of the money spent on potential claims, such as attorneys’ and consultants’ fees, is absorbed by CAMICO and not charged against the deductible or policy limit – a benefit to policyholders.
- CAMICO believes so strongly in the early reporting of potential claims that it will reduce a deductible by 50% (up to $50,000) during the policy period in which the potential claim becomes known, or for use of formal mediation to attempt to resolve a claim.
If the potential claim is not reported on time, CAMICO has "Continuity of Coverage for Potential Claims," which provides broader protection for potential claims known to an insured while coverage is consecutively renewed with the CAMICO program.
The following claims scenarios have been drawn from CAMICO’s claims files to illustrate some of the dangers and pitfalls, and how to avoid them.
The 'Classic' Claims ScenarioThis scenario has recurred many times over the years, yet CPAs often can’t believe that it is happening to them. The services rendered were so "low level" (e.g., bookkeeping, write-up engagements), that it is hard to believe there is any liability exposure for embezzlement or fraud.
Here’s how the scenario usually unfolds:
The client is a small business owner too busy running the business to supervise the bookkeeping and banking activities. On top of that, there aren’t enough employees to justify segregating the receipt and disbursement functions.
The duties of receiving and disbursing funds and reconciling the bank accounts are all handled by one trusted employee who uses an accounting software program to stay on top of financial activity. The program enables one person to control the business’s funds and bank accounts, thereby facilitating the perpetration of fraud.
The client engages a CPA to perform services that do not include any procedures designed to discover embezzlements, defalcations, or other irregularities. After any number of years have elapsed with the CPA rendering such services, the client discovers an embezzlement by the trusted employee and is extremely disappointed that the CPA did not uncover the fraud as part of the services rendered. The longer the CPA has been performing services for the client, the more outraged the client is that the CPA didn’t identify the fraud. The typical jury expects CPAs who have serviced a small business client for five years to have a profound understanding of the client’s business, regardless of the services performed.
What Claims Experience Has Taught UsCAMICO’s claims experience and jury studies show that most jurors will agree with a client's expectation that the CPA should have detected fraud, especially after about five years of services. Client, jury and public expectations of CPAs have increased over the years to the point where CPAs are expected to: 1) always detect fraud; and 2) advise and warn clients about their fraud exposures.
The expectation to always detect fraud can be extremely difficult to meet, but the expectation to advise and warn is much less difficult. By advising and warning clients of their defalcation exposures, CPAs can minimize liability stemming from the expectation to detect fraud.
Advice to clients about their defalcation exposures is best provided in an advisory letter that: 1) warns about the general risks; 2) suggests steps clients can take to reduce the risks; and 3) offers CPA services to help address the risks. An informed client is better able to avoid defalcation. If a defalcation is later uncovered, the CPA has documented evidence of having warned the client and offered a service to address the risk. Clients should also be notified of “loose ends” such as sloppy bookkeeping and late bank reconciliations.
Examples of internal control warning letters can be found in the Fraud Resource Center on the CAMICO Members-only Site under "Risk Management Tools and Engagement Letters." Engagement letter language should include a client acknowledgment that they understand and agree that the CPA’s services are limited in scope and not designed to detect employee embezzlement or other fraudulent activities involving the client’s bank accounts.
Limitation of liability clauses can also be useful for containing liability. CAMICO strongly encourages CPAs to review such clauses with a risk advisor or legal counsel, as appropriate, for possible modifications. Also, it is important to note that the U.S. Securities and Exchange Commission (SEC) forbids the use of indemnity clauses in engagement letters with public companies. Useful sample engagement letter text can be found under "Summary of Engagement Letter Components" in the Engagement Letter Resource Center on the CAMICO Members-only Site. Sample letter templates for a wide range of services and engagements are available in the Engagement Letter Resource Center.
The ‘Unusual’ Claims ScenarioThe CAMICO Claims department often handles calls from policyholders reporting potential and actual claims involving a wide variety of problems and conflicts, many of them including illegal or unethical conduct. Examples include:
- Business or limited partnerships in which a partner or partners are stealing from other partner(s). In one situation, two partners were embezzling funds from their business, and when the thefts were eventually uncovered, both partners sued the CPA for not detecting and reporting their embezzlements.
- CPAs caught in the middle of situations involving confidentiality considerations and conflicts of interest between two partners (or spouses). Claims experience and jury standards demand that CPAs be the “watchdog” and “do the right thing” – not an easy task in many cases. CAMICO Claims and Loss Prevention specialists help policyholders navigate these difficult situations.
- CPA firm staff misusing or misappropriating client funds entrusted to the firm in bill-paying, business management, or executor/trustee engagements. CPAs are viewed by the public (and jurors) as experts in tracking financial activity and establishing appropriate internal controls. Firms not meeting that expectation often find themselves embroiled in litigation.
- Sexual harassment, discrimination, wrongful termination and other employment practices claims. CAMICO has handled these claims since 1994, resulting in 23 years of employment practices Claims and Loss Prevention experience. Policyholders with Employment Practices Liability insurance coverage have access to advisory and consulting services and resources. Issues surrounding employee use of social media are also addressed.
Cannabis business clients are another example of emerging risk exposures and issues that CAMICO has addressed. Since the U.S. federal government considers the marijuana business to be illegal, the business presents special issues in those states where the state government considers it to be legal. The federal government’s policy has been to not target marijuana distributors unless they violate both federal and state laws, which means distributors not complying with state laws may face federal enforcement actions.
Federal income tax treatment is affected by marijuana being a controlled substance under federal law. Internal Revenue Code § 280E denies a deduction or credit for amounts paid or incurred in any trade or business selling, distributing or trafficking in marijuana. However, a marijuana business may reduce gross receipts by the cost of goods sold in order to determine gross income. Also, cannabis businesses that engage in other activities that do not involve the sale of marijuana may be able to take all otherwise allowable deductions for these other activities. This creates pressure on the client to allocate expenses to cost of goods sold or these other activities. That pressure can lead to taking tax positions that the Internal Revenue Service may later contest, resulting in assessments of additional tax plus interest and penalties. CPAs must therefore document in an engagement letter that the firm will assume no liability for any such additional penalties or assessments.
A sample engagement letter template (“Cannabis Client Tax Engagement Letter”) can be found on the CAMICO Members-Only Site in the Engagement Letter Resource Center under “Tax Letters” and “Other Tax Letters.”
Accounting treatment for marijuana business clients also requires special consideration. Transparency in financial reporting is the best approach from GAAS, SSARS, financial reporting framework (e.g., U.S. GAAP) and risk management perspectives. Appropriate disclosures of all aspects of the business need to be made to add clarity and reduce CPA firm risk. Disengagement is recommended if the client refuses to provide written representations sought by the CPA.
These are just a few examples of the many issues CAMICO has addressed over its 31 years of helping CPAs manage their risk exposures. CAMICO’s Loss Prevention department provides policyholders with guidance on these and any other CPA issues and questions, and the Claims department handles potential claims, claims, subpoenas, regulatory requests for information, and all other claims-related questions.
As always, policyholders are encouraged to call CAMICO at 1.800.652.1772, or email firstname.lastname@example.org with any questions or concerns.