Risky Business: How not to get sued (and what to do if you are sued) 

This paper was written and presented by Fiona Halsey at The Tax Institute 45th Western Australian State Convention. 

CONTENTS

1       Introduction

2       Establishing an effective risk management system

3       Particularly dangerous areas of work

4       Establishing an effective complaints management procedure

4.1        The person who caused the complaint

4.2        Managing the complaint or claim

4.3        Criminal matters

4.4        Conserving evidence

4.5        Settlement

4.6        Moving assets

5       Professional indemnity insurance

5.1        Consider the value of insurance, not just the price

5.2        Do not change insurers lightly

5.3        Informing the insurer of a claim, or of facts which might give rise to a claim

5.4        Obtaining your own legal advice

6       Step by step process for when a complaint is made

7       Conclusion

1    Introduction

It ain't what you don't know that gets you into trouble.  It's what you know for sure that just ain't so.

Mark Twain

The increasingly litigious nature of commercial dealings means that professionals are becoming increasingly aware of risk management, and how to manage any claims which arise.  It is a rare accountant in public practice who will never be worried that they have made a serious mistake, and whether they may be sued as a result of that mistake.

The purpose of this paper is not to provide a legal analysis of cases where accountants have been sued.  Rather, the purpose is to give a practical guide to minimising the likelihood of claims, and successfully dealing with claims if one does arise.

2    Establishing an effective risk management system

The first step to minimising the likelihood of a claim is to have an effective risk management system.

Some basic principles of risk management are:

§  Ensure that you are clear about the advice which is being given, or the work which you are undertaking.  This is becoming more difficult during a transaction, because often advice is given in a less formal way (i.e. through email, or even by SMS).  This means that it is fundamentally important to scope the task at the beginning of the transaction.  This should not be hidden within the depths of the retainer agreement - there needs to be a very clear statement as to precisely what advice is being provided by the professional.  This is particularly important in situations where your firm does provide advice in the area which falls outside the scope of the retainer.

§  Ensure that you and your staff get enough rest and take regular holidays.  This is one of the basics.  If you notice a person in the office making regular errors (or yourself) this is a warning sign that a break needs to be taken.  Client demands can be overwhelming, however, the costs of a claim, both financially and professionally, will generally make those client demands seem meaningless in comparison.

§  If you notice that the general error rate within the firm is rising (even small errors), consider what steps are necessary before any serious problems occur.  Are your staff spread too thinly, is more training required, do you have the wrong mix of staff?

§  Consider seriously whether you want to work with dangerous clients, and if so, what particular risk management strategies need to be employed for those clients.  You will have a feel for clients who are particularly dangerous - often they are inexperienced and chaotic with chaotic correspondence styles (we all know the emails which are sent by these clients at 3am, which are confused and often rambling, where a major part of the task is deciphering the email).

§  Remember that a number of large clients have now participated in programs where staff are taught how to shift risk to their advisers.  This is particularly so with larger clients.

§  The importance of contemporaneous file notes cannot be over-estimated.  In Watson v Foxman & Ors (1995) 49 NSWLR 315 the Court held that, as a matter of ordinary human experiences, the recollection of spoken words in a conversation is often fallible for a variety of reasons.  The fallibility of human memory arises as "recollections of what was said, or intended, are inevitably clouded by the overlay of emotion and by the intrusion of individual hopes and expectations and feelings of entitlement".  As a general summary, where there is only oral evidence between a client and an adviser as to what has occurred, the courts will often prefer the evidence of the client, on the grounds that the client only had one matter going on, whereas the adviser had multiple matters going on, and hence, the client's recollections are likely to be more accurate.  A contemporaneous file note can be a complete circuit breaker in these situations.

§  Only work in an area where you are skilled.  While we have not seen any specific research on this point, the general anecdotal evidence is that people who are real industry experts in an area are less likely to make errors.  On the other hand, the courts have found that persons who hold themselves out as having a particular skill will be held to a higher standard.

§  Be sure that you stay up to date professionally.

§  Ensure that all staff who work for you understand the importance of risk management.  Too often, only professional staff are included within risk management training.  However, there are often cases where other staff can be an important part of the team to catch and prevent errors. 

§  Ensure that you have effective staff engagement in your firm.  One has a feeling for when staff care about a firm, and the outcomes.  If staff are not mentally engaged, they will not go the extra mile to prevent errors occurring.  It is often the mentally engaged junior who sees possible errors and brings these to your attention.

§  Be especially careful of experienced staff coming from other firms.  These staff may not be as bonded to your firm and committed to firm procedures as people who have worked within your firm for a lengthy period.  You may also be surprised at the different procedures between firms.  Often a system is holistic, so that there are methods of catching errors which are effective when the entire system is implemented.  A person used to a different system may not continue on with the systems which were used in their previous firm, but not quite fit into the procedures used in your firm.  That is the worst of all worlds.  It is also not uncommon for staff moving from a different firm to have exaggerated their experience, so that you may believe that they have skills which they do not have.  Almost every principal will be familiar with a situation where this has occurred.

§  There is no substitute for proper supervision, and a situation where two skilled people work on a matter - one more junior and one more senior.  In this situation, errors are much less likely to occur.

§  Consider where you can use checklists in your firm.  Checklists dramatically reduce the chance of error.  These should be created, and then regularly updated, and kept in a place where all staff can access them.

§  Consider which areas of work are particularly dangerous, and ensure that, where possible, there is a second principal or other senior staff member involved to provide a second set of eyes.

§  Consider clients who are particularly vulnerable - the adviser will have a higher duty of care in those situations.  Examples of these are if you are dealing with a client who has a physical disability, is elderly, or has English as a second language.  In such a situation, you should be especially careful, and you may wish to ensure that a second staff member is present with you during meetings.  If there is any question about language, the Commonwealth provides an excellent interpreter referral service.

§  Understand that a complaint being made may have a serious effect on the professional confidence of a staff member.  Frankly, if it does not have a negative effect on the staff member's professional self-confidence, then you should be worried.  The staff member is likely to need support and supervision, as they have probably lost faith in their own judgment.

§  Ensure that matters are properly explained to clients at the outset, and that clients understand risks.  While there are some clients who are unreasonable, and who will seek to take advantage of an opportunity to make a claim, even where they were warned of the risks involved, most clients are reasonable, and will say later "yes, you warned me".

§  If you do receive a complaint, consider what other matters or clients may have been affected by similar circumstances.  There may be an opportunity to fix the problem in respect of other clients, with minimal cost and penalties.

§  Have properly documented policies and procedures within the firm, so that principals and staff know what is expected of them.

§  Have an electronic communications and social media policy, and ensure that your staff follow this.

§  Consider noise levels in your firm - a noisier environment almost certainly leads to a greater error rate.

An important part of an effective risk management system is reminding principals and staff of the system, and keeping people focused on risk management.

At least once a year, there should be a risk management workshop or seminar within your firm, conducted either by a person within the firm who has a particular interest in risk management, or a skilled risk management professional.  There are multiple purposes for this:

§  Risk management workshops and seminars remind staff members and principals of the importance of risk management procedures.  People often become sloppy over time, especially with regards to taking file notes, thinking about risk management and so on.  The daily pressure of professional life, undertaking client work, managing budgets, keeping up to date professionally, are all daily pressures.  Those pressures can easily take precedence over the important functions of risk management.

§  New staff members may have come to work at your firm, and they may not be aware of your firm's risk management procedures.  They may also have come from firms with sloppy risk management procedures, and may not be aware of the procedures within your firm.  While much of this may have been covered during the induction process (assuming you have an induction process), at that time, the new staff member will almost certainly have been over-loaded with information, and probably unlikely to have optimally absorbed all of the information at that time.

§  Conducting risk management workshops and seminars at least once a year gives you the opportunity to deal with new technology.  This is becoming increasingly difficult and important, and increases risk.  There was once a time when letters were carefully written and posted, allowing time for careful consideration.  Now, it is more likely that advice is given by email, and even sometimes by SMS.  Of particular concern is that advice is being given in situations which have not allowed sufficient time for thought or reflection.

3    Particularly dangerous areas of work

The following are particularly dangerous areas of work:

§  Audits:  This is a well-known dangerous area of work.  In the last few years, we have seen cases involving audits and several of the large firms:

* These amounts have been suggested as a result of press comment.  It is unknown whether these are definitely the amounts of the settlements.

Although these cases have not been subject to court judgments, it is understood that the settlements have been for millions of dollars.

Third party actions have been increasingly common, and typically involve large sums of money.  However, these are not largely the subject of this paper, given an audience of mainly tax advisers.

§  Due diligence on business acquisitions:  This has always been an extremely risky area of work, due to the nature of the asset being acquired.  There is often an underlying dissatisfaction by the purchaser, and this can be increased when it is discovered that there have been unexpected tax liabilities.  One would have to say that providing due diligence on the acquisition of shares is especially dangerous work, given that the liabilities of the company move to the purchaser.  Payroll tax and SGC liabilities are particularly common areas of exposure (which probably makes it worthwhile bringing in specialist advice on these topics).

§  Tax effectives:  There are many accountants who are currently subject to claims or complaints relating to Great Southern, TimberCorp, Rewards Group and so on.

§  Small business CGT concessions and exemptions:  The legislative provisions are extremely complex, and the concessions are heavily audited by the ATO, which means that any errors are quite likely to be found.

§  Business structuring:  Many accountants give advice in these areas, often without adequate training (a major concern is that quite often the PI policy does not respond, because the accountant has been giving legal advice).

§  Excess superannuation contributions.

The following are areas where we believe it is likely there will be exposure going forward:

§  SMSF's - the sheer value of assets in SMSF's, combined with fee pressure to do things cheaply, and draconian tax treatment when errors are made, mean that we expect there will be increasing exposure here.

§  Computer systems which generate wills without the clients ever meeting a solicitor, where all input has occurred by the accountant.

§  All of the areas mentioned above.

Also, beware the class action.  We are starting to see class actions for matters involving as few as 16 people.

4    Establishing an effective complaints management procedure

It is a fact that firms will receive complaints from time to time. 

It is advisable for a firm to have a complaints management procedure.  This procedure should be known within the firm.  In addition to the formal steps, there should be a general process.  The principles behind this would probably be based on the following.

4.1     The person who caused the complaint

The person who caused the complaint (and this phrase is used in a very general sense - there is no fault attached at this time) should receive support from the firm.  The reasons for this are many:

§  It is generally undesirable that the person leaves the firm (unless they are a chronic source of problems), as they will be unavailable as a witness.  It is extremely difficult to counter a client's verbal assertions if the firm is unable to present the opposite position.

§  The person may become more tightly aligned with the client, and may assist the client in their complaint.  We have seen situations where the individual who caused the complaint has told the client that the complaint was caused by someone else within the firm, and then persuaded the client to move to another firm, to which the individual was planning to move.  This sounds counter-intuitive, but does occur.

§  Other members within the firm are watching what occurs.  It is often the case that matters can be handled at an early stage, if caught early enough and not allowed to develop into larger problems.  If staff members see that the firm is supportive, and that the person who caused the problem is not professionally decimated, they are more likely to inform senior management of any problems which arise.

As a general rule, the person who caused the complaint should not be the person who manages the process of responding to the complaint, or handling the complaint.  A senior person from within the firm should manage the complaint.

A "worst case" example of handling a complaint is that the person who made the mistake is shouted at and told that they have caused the complaint, so they should fix it.  The reasons that this is problematic are many, including that:

§  the staff member is probably very stressed about the situation, and most people behave worse under high levels of stress;

§  the staff member may not look at the situation objectively;

§  the staff member's relationship with the client is probably poor (if it is not, then the staff member may side with the client against the firm);

§  a fresh set of eyes may see ways of solving the problem, or may know that there are reasons that the complaint is not justified; and

§  the staff member is likely to be extremely defensive.

4.2     Managing the complaint or claim

There is often a tension between being actively involved in handling the complaint, and making admissions.  You may need to have a word with the client, in person, and tell them that the firm is taking the complaint seriously, and working to manage the situation.

If it is at all possible, positive relations should be maintained with the client.  There are a number of reasons for this, one of the primary ones being that it will probably be necessary to conduct settlement negotiations with the client (or at least your legal team or insurer will need to do that).  If you have a positive working relationship, it is probably going to be easier to settle the matter. 

Do not send any written communication to the client without consulting your legal adviser.  This could contain admissions, denials, or inflammatory, defamatory or offensive remarks.

You may also be able to maintain the client as a client of the firm.  Realistically, if the matter actually goes to court, it is unlikely that you will be able to do this.  However, not all matters turn into actual claims.

It should go without saying that any work undertaken to fix the complaint should not be charged to the client.  This is frequently an area where sending a bill can move a general grumble into a claim, and may require diligent handling.  It is easy within any firm (other than a sole practitioner, arguably) for bills to be virtually automatically generated.  Everyone working on matters relating to the client should be warned that time relating to the complaint matter should not be billed to the client.  It is also a good idea to talk to the client complainant, and tell them you will not be billing.  You should also tell them that if by some error an account is sent to them, for them to please contact the person directly handling the matter, and that person will ensure that the account is withdrawn.  That will provide some protection in the event that an account is sent in error.

It is preferable that a separate accounts code is established for dealing with the complaint.  This means that it is less likely that time will be mistakenly billed to the client, allows the firm to see the true cost of the complaint and so on.

It is very common for a client to make some kind of statement to the effect that this is not personal, and that the reason for the claim is to access the PI policy, and that it should not bother the adviser.  In our experience, telling the client that it is personal to the adviser, and that the adviser will bear a proportion of the costs, is of not benefit whatsoever to the adviser.  The client simply does not care - they believe that the adviser has caused the client loss, and they intend to recoup those monies.

4.3     Criminal matters

There are, on occasions, matters which appear to involve criminal behaviour.  In those situations, it is generally important to inform the police.  Failure to do so could potentially cause other members of the firm to become accessories after the fact.

4.4     Conserving evidence

In situations where it seems that a claim might be made, you should be careful to consider the evidence.  In most situations, clients have at least 7 years in which to bring a claim.  We have worked on a number of situations where this has occurred by a window of 1 or 2 days. 

You should:

§  work with your solicitors to obtain a statement from the staff member or staff members involved;

§  engage your IT staff to obtain any relevant evidence from the firm's computer systems (this evidence rarely improves with time - you should capture whatever you can as early as you can), and to capture this in a least two formats if possible; and

§  order any paper files from archives, and ensure that these are kept in a safe place.

In general terms, the idea is to marshal all relevant information and evidence.

It is generally preferable, if there are paper records, that these are maintained in paper (they may also be scanned).  Litigators often find that when papers are scanned, the quality of scanning may be less than perfect - for example, only one side of the paper is scanned, or a sticky note is sitting on top of crucial information.

Clearly, we recommend against creating evidence after the event.  We have seen a number of situations where this has occurred, and it seems to be very difficult to get this right.

4.5     Settlement

Each matter will be different, so it is impossible to make an outline for when and how settlement negotiations will occur.  As noted in other parts of this paper, we recommend that you try to maintain a workable relationship with the client, as this will mean that settlement may be easier than it will be if you and the client are at war.

Carefully consider the potential claim (someone other than the person who did the work), and get an external third party (unrelated to the matter) to check your calculations.  It is common that the person or the firm who will have to pay any settlement amount (subject to the insurer providing cover) will often attempt to minimise the exposure.  We have seen situations where the firm who is subject to the complaint has made such extreme stretches of logic that the loss which they calculated was in the order of 20% of the actual loss.  Such a calculation helps no-one.  It inflames the situation with the client, and makes reaching a proper settlement less likely.

Do not make any settlement offer without conferring with the insurer.  It is almost certainly the case that the insurance policy forbids the making of any settlement offer without the consent of the insurer.  However, in a situation where there is an insurer who has not yet come on claim (i.e. is still waiting for information, or fence-sitting), the insured has a duty to behave as a prudent uninsured, which can mean that the making of a reasonable settlement is fulfilling that duty.  In such a situation, you should not make a settlement offer without having an advice on file from a suitable legal firm, stating that the matter should be settled, based upon advice as to quantum and liability.

4.6     Moving assets

At this time, one of the questions most frequently asked is whether or not assets should be moved.  It is almost certainly too late for this.  Bankruptcy claw-back provisions are quite stringent, and the ability for creditors to claw-back now goes back for several years.

The case law on this point is not supportive of moving assets from the professional member of a couple to the spouse.  The Cummings case is a well-known case, where the barrister involved had moved his assets many years before.

It is generally thought preferable to have good insurance, and to maintain insurance with the same insurer, than it is to move assets after the event.  That said, there are many professionals who openly say that they are "men of straw", not maintaining any assets in their own names, perhaps other than a depreciating asset such as a motor vehicle.

5    Professional indemnity insurance

Professional indemnity insurance is an important line of defence.  However, quite often, it is not until a claim is made that one sees the quality of the policy which has been obtained.  Some basic principles to consider when obtaining insurance are as follows.

5.1     Consider the value of insurance, not just the price

At renewal time, it is quite common that your broker will provide more than one quote.  The quotes may be quite different.  The potential size of a claim is such that we recommend against economising on insurance.

Also, carefully consider the amount of insurance which you acquire, and the deductible.  Currently, we are working on policies with deductibles between $5,000 and $25,000, which is quite a range.  When considering this, one must consider what occurs if there is more than one claim.  The firm may be able to bear one deductible of $250,000, however, is it able to bear more than one? 

When considering the amount of cover, it is wise to recall that in most cases the limit of cover includes costs.  As a very rough rule of thumb, many insurance litigators suggest that the costs are likely to be in the order of 30% of the claim.

The result for ABC is as follows:

When considering quotes from insurers, the potential insured should seek advice from its brokers.  In our experience, it is worth working with a skilful and experienced broker.  Such a person will know the difference between policies and insurers.  We have been very surprised over the years by what is and is not covered, and found that it is often quite an unpredictable area.  Additionally, an experienced broker will know which insurers pay out on claims, and which do not.

The claims which are actually covered by the policy will also be important.  For example, some professional indemnity insurance policies will cover the costs of professional investigations.  This can be of great comfort.  At least one insurer provides an "Official Investigation and Enquiries Extension" to its accountant clients. 

Be especially aware that there are some areas which are probably not covered by your firm's insurance policy, including:

§  director's and officer's cover;

§  legal advice (i.e. where the accounting firm has strayed into the area of giving legal advice); and

§  financial planning and investment advice (unless there is a specific clause in the policy which covers this advice).

If this has occurred, the insurer will almost certainly not provide cover.

One final point - it is possible to obtain cover for particular transactions, however, this is generally quite expensive.  You could conceptually include this when quoting for a particular job.

5.2     Do not change insurers lightly

We do not recommend changing insurers, unless there is absolutely no choice, or the policy which is offered is quite unsuitable.  One of the most frequently used methods of avoiding claims is that each insurer will argue that the notification should have occurred during the period of another policy.

If it is entirely necessary to change insurers (for example, the current insurer refuses to provide cover for the next policy period, possibly due to the claims history of the insured, or even because the insurer is not offering that kind of insurance going forward), then the insured will have to obtain advice as to precisely what matters should be notified.  It is likely that the advice will be that everything which could potentially be a problem is notified.

5.3     Informing the insurer of a claim, or of facts which might give rise to a claim

Almost all professional indemnity insurance policies are structured as "claims made" policies.  This means that the insurer will indemnify the insured in respect of any claims made against the insured and notified to the insurer during the relevant policy period. 

The definition of "claim" varies between policies, however, an example of a definition is, "any demand made by a third party upon the insured for compensation, however conveyed, including a writ, statement of claim, application or other legal or arbitral process".

Example