Accounting firms struggling with rising liability insurance premiums have two words to say: thanks Enron.
Since the accounting debacle at the former energy giant drove venerable accounting firm Arthur Andersen out of business, accounting firms across the country have been grappling with soaring insurance rates, the Philadelphia Business Journal reported.
"Insurance companies only care about limiting the risk of claims payout and, with the trend of increased claims against accounting companies, they see a need to increase those costs," Isdaner & Co. of Bala Cynwyd Administrative Partner Allan Cohen told the Business Journal.
While Cohen's firm has never been sued for malpractice nor has it been taken to court by a disgruntled client claiming CPA ineptitude, the firm anticipates a premium increase of 10 percent to 25 percent when its current liability policy runs out in February.
Cohen has made a point in his firm to be more choosy about the clients the firm accepts, in an effort to mitigate liability.
"You have to assess the risk of taking on a client and proceeding with that client, more so than ever before," he told the Business Journal. That means examining the client's internal controls, looking over the manner in which the books have been kept and the ways in which information is handled. "You have to look beyond what the fee arrangement is, to look at the integrity of the client."
Some say the best way accounting firms can help themselves is to never sue a client who almost always turns around and counter-sues for malpractice, which drives up rates. Experts also urge the use of engagement letters to set expectations from the outset of an accountant-client relationship. These letters can result in a 5 percent to 7 percent savings on liability insurance premiums, the Business Journal reported.
Most agree, however, higher premiums are here to stay. "There is no underwriting justice to it," Cohen told the Journal, "but it is just a fact of life we have to deal with."