Minimize Losses: Report Incidents Early

Minimize Losses: Report Incidents Early

Over the past 15 years, Camico policyholders have reported more than 11,000 “potential claim” incidents to the company’s loss prevention and claims specialists for advice on how to manage the incidents and minimize losses. The loss ratios of firms making the most calls are generally excellent, mainly because early reporting enables Camico specialists to work with policyholders in managing the outcomes of incidents and claims.

Following are just a few examples, drawn from Camico claims files, of incidents reported early by policyholders and resolved with the help of loss prevention expertise.

Early Disengagement

An insured CPA firm already had begun work on an audit engagement. A signed engagement letter had been received, but not all of the client acceptance procedures had been completed. The client’s CEO had given the firm an incorrect Social Security number, according to a background check, and had yet to provide his correct number. Meanwhile, the auditors found the client’s records in disarray and potential litigation pending against the client.

The firm called for a Camico specialist, who asked for a copy of the engagement letter. The letter indicated, as it should, that the firm was not bound to the engagement until certain client acceptance procedures had been completed. The specialist advised that there are risks in disengaging but perhaps even greater risks in not disengaging. The firm decided to disengage, and there were no further developments.

Potential Conflict of Interest

A lending company engaged an insured CPA firm to evaluate the loan collateral of a manufacturing business. The lending company already had loaned several million dollars to the manufacturer. The firm evaluated the collateral and recommended that no more loans be made. The firm also offered to consult with the manufacturer to help find ways of making the business healthier.

The firm began the consulting engagement, but the manufacturer’s management expressed a misconception that the consulting engagement would qualify the business for more credit. When the firm tried to clarify the scope of the engagement with the manufacturer and the lending company, the lending manager in charge of the account lost his temper and sent threatening letters to the firm and the manufacturer.

The firm contacted Camico and a specialist pointed out the potential conflict of interest the firm had, working for both the lending company and its client. Since the lending company and the manufacturer were now at odds with each other, the specialist recommended disengaging from the consulting engagement with the manufacturer. The specialist also recommended contacting someone else in management at the lending company to see if the business relationship could be preserved. The firm disengaged from the manufacturer, established a better contact with the lending company, and there were no further developments.

Tax Interest and Penalties

The insured, a CPA tax preparer, miscalculated the basis of real property being sold, resulting in the Internal Revenue Service sending a notice that tax, interest and penalties were due. The taxpayer sent the assessment notice to the CPA.

The CPA contacted a Camico specialist, who helped the CPA prepare a penalty abatement request. The request stated that the taxpayer relied on the advice of a professional who made an unintentional mistake—a reasonable excuse for underreporting income. The IRS agreed to abate the penalties but still sought the interest due. The specialist pointed out to the CPA that the taxpayer’s use of the tax dollars, from the date they were owed to the date paid, was an offsetting benefit to the interest being assessed to the taxpayer. The interest was paid, and the matter was dropped.

Possible Lawsuit

An insured firm performed bookkeeping services and paid the bills for a medical group of six doctors. The group was sued by a patient and discovered that it had had no malpractice coverage in place for the period of time when the alleged malpractice occurred. One of the doctors in the group advocated suing the CPA firm for failure to pay a malpractice insurance premium for extended reporting “tail” coverage.

The firm called a Camico specialist, who verified with the firm that a bill for a malpractice “tail” policy was never received. The specialist also verified that the firm had an engagement letter, signed by the doctors, that limited the scope of the engagement to bookkeeping and paying bills received. The specialist explained to the client that the firm bore no liability, and a lawsuit was never pursued.

Bartering of Services

An insured firm was engaged to provide consulting services to help the client’s business out of financial trouble and to obtain a new loan. The firm and the client agreed to barter services to help pay for some of the firm’s fees. The client’s business continued to decline in value despite the services received, and the client filed a complaint with the state disciplinary board, alleging that the CPA was negligent and overcharging.

The board asked for records and documentation of the fees, but the fees were not adequately documented because of the bartering of services. Camico retained a defense attorney to appear on behalf of the insured before the board. The attorney gained an extension to produce the records, which gave him time to review the documents prior to their release to the board. The attorney also prepared the insured for a hearing before the board.

The board ultimately found that the work rendered by the CPA was within the required standards, though there were some concerns regarding the bartering of services, and the client dropped the matter. Camico advised the CPA to discontinue bartering, to accept payment for services rendered, and to pay separately for services received in order to avoid future documentation problems.

Camico Mutual Insurance Company is the New York State Society of CPAs’ endorsed professional liability insurance carrier.