One of the key points I invariably highlight during my talk on ‘Avoiding negligence claims’ concerns a pretty standard term that appears in PI insurance policies. Indeed it’s as important a term in PI policies as the ‘Don’t admit liability’ clause is in motor car insurance policies.

All drivers are well aware that if they are involved in a car accident they must not admit liability. To do so could invalidate a key term of their insurance policy. The fear that we all have is that were we to breach this term our insurers might refuse to pay out – if the claim is successful.

The same point applies to PI policies.  One of the key terms states that the insured will report ‘all circumstances that could lead to a claim’.  This means ALL circumstances – not simply those cases that the accountant fears he might lose.

I heard of a case recently involving a sole practitioner. An ex client made what the accountant KNEW was a spurious claim against him and reported him to the disciplinary committee of the ICAEW.  The accountant knew it was a ‘try on’ and that he had nothing to fear so he had not notified his insurers. Whilst he was awaiting feedback from the ICAEW his PI policy came up for renewal.  He was obliged to dislcose the onging proceedings when completing the renewal paperwork.  That was when he realised that he should have notified the insurers IMMEDIATELY.  His premium was increased pending an investigation by the insurers into all the circumstances of the case – they wanted chapter and verse despite the accountant’s protestations that the accusations were without merit.

The insurers concern was the fact that the acountant had not complied with the terms of his policy and notified them immediately he became aware of ‘circumstances that could lead to a claim’.  Eventually the ICAEW agreed that the accusations were without merit; indeed the accountant had no complaint about the way the ICAEW handled the matter. His insurers also eventually stopped asking questions but the increase in his premium stayed in place for a year.  Lesson learned!

How often do you turn away prospective clients?

During my talks about ‘How to avoid professional negligence claims’ I refer to that awful feeling you sometimes get in your gut when you meet a new client (or, more accurately, a prospective client). It’s the feeling that makes you think this person could be more trouble than they’re worth.  Sometimes you just know.  Other times you are consciously aware as to why you shouldn’t take someone on.

Maybe their only interest seems to be in how low you will set your fees.  That’s never a good sign is it?

In another of my talks about ‘How to make more profits from your smaller clients’ I stress the benefits of being clear as to the sort of clients that you want.  This is more than simply identifying a specialism or niche.  It makes you choosy. Selective.  And that will often make you more attractive as an adviser.  It’s as if it’s a privilege to become your client.

And, best of all, it reduces the prospect of you taking on clients that are not worth the effort. It allows you to FOCUS and, in so doing, to build a more successful, profitable and enjoyable practice.

Think accountants can’t do such things?  I disagree.  If it’s good enough for an IFA, then I’m quite sure that ambitious accountants can adopt the same technique. Here’s the ideal client profile for an IFA practice, Informed Choice, run by a friend of mine, Martin Bamford.

If you possess some the following attributes, you are likely to receive the greatest value from our professional services. • You have investable assets (including pension funds) of between £200,000 and £1m • You are 35 to 65 years old • You are prepared to seek professional advice and you are able to make decisions • You are married with children, or family is important to you • Your attitude towards investment risk is neither extremely cautious or extremely adventurous • You have at least a basic understanding of personal finance but appreciate the value of good advice • You are nice to work with, have a good sense of humour and are polite (because we are— always!) Of course this is not a definitive list and we do work with clients who do not possess all of these attributes, but when we are looking for new clients to work with, we find that this tends to be the best description of our ideal client profile.

Now how could you adapt that approach for your practice? Even if you don’t publicise it you will do well to have it mind when meeting with prospective clients.

As regular readers will know, one of the talks I regularly present to accountants and tax advisers around the UK addresses Negligence claims and what you can do to avoid these.

Early on in the talk I know that I shock some of my audiences when I spend a few minutes talking about Forgery and fraud.  I outline the relevant law, the penalties and some of the activities that fall with this remit.  I explain the relevance of this and how it relates to the rest of the material being addressed.

I was reminded of this when reading the Sunday Times report about legal action being taken against Izodia’s professional advisers.  The paper’s reporters predicted this outcome almost exactly two years ago.

The claim was lodged last Friday and apparently names the law firm’s company secretarial arm as a defendant.

“According to the claim, a Fladgate partner “signed a forged and fraudulent minute purporting to record a board meeting of Izodia [that never took place]”. The partner is also alleged to have said that at the “meeting”, three individuals were directors of Izodia when they were not. The “meeting” was said to have authorised the opening of a bank account with RBS International through which money was siphoned off by ["serial crook Gerald Smith"].”

In my talk I explain that a top litigation lawyer told me that the most common reason that accountants get involved with illegal acts is that they are too focused on trying to help their clients to realise the implications.   Backdating a document is but one example of how a fraudulent document may be created. It’s a crime under the Forgery and Counterfeiting Act 1981 and such crimes qualify for a prison sentence.

As I note during my talk – the consequence of such allegations would be even worse than in respect of a negligence claim. And if a disgruntled client is unable to purse a negligence claim against you, then you want to ensure they aren’t in a position to allege that you’ve been involved in any criminal activity.  Such activities would include the creation, copying or using false instruments or the making of false representations.

This was another of the thoughts I had during the workshop that followed the E-business for accountants seminar that I attended last week. (I’ve already commented on the seminar here and here).

One of the workshop leaders was suggesting that accountants should be more prepared to ‘upskill’ their clients as regards their e-business strategy. I asked whether he meant:

• To be better able to talk to clients knowledgeably about e-business related subjects and to be able to introduce specialists to help the client with their issues; or
• To be able to provide billable advice as regards e-business related issues (as distinct from the conventional services that accountants provide).

The point being that accountants want to be provide value to their clients and to be paid for the provision of valuable advice. Some might alternatively say they want to be paid for the time they spend providing valuable advice.

I’m not sure that the speaker had considered the distinction before I explained it. The seminar had been promoted as “a chance to acquire new skills that enable you to advise your clients on their e-business strategy.”

In replying to my question however the speaker made clear that he was referring to the first of those options. That made sense to me – although it was a big step down from the alleged objective for the seminar.

The speaker’s worthy aim was refined as encouraging accountants to assist their clients with e-business related issues and introduce relevant reputable specialists. This makes more sense to me than trying to ensure that accountants are able to provide valuable advice on such matters themselves.

I tend to think that a little knowledge can be a dangerous thing. This is just as relevant in the fast evolving world of e-business as it is in the world of tax which I know so well. (And I recently explained the reasons why I gave up giving tax advice).

I’ve learned a fair amount about many aspects of e-business over the last couple of years – from web marketing to search engine optimisation to the differences between effective website design and website development. And so much more. I’ve put much of this knowledge to good effect in my Tax Advice Network but I know my limitations and take advice from experts – not amateurs.

Still, accountants are often revered for their all round business knowledge. Revered and respected. That puts them in a powerful position and it’s one of the reasons why plenty of those e-business experts want to work with accountants. They believe that you are well placed to make trusted introductions to your clients.

On the tax front it was for similar reasons that I chose accountants as the main target audience for my Tax Advice Network. I know that good accountants know what they don’t know. They are aware of the dangers of going beyond their levels of competence when advising clients on unusual or complex tax issues. And they want to involve trusted, vetted, recommended, commercial and often local tax experts. That’s what we’re all about of course.

Going back to that distinction I drew at the start of this posting. How far do you go?

These have evolved a great deal over the last few years, both to reflect the changing approach of HMRC and also the feedback from accountants and their clients.

I must admit that I’m torn. If I were still in practice I’m sure I’d want to ensure that my clients had this sort of cover. Equally I’m aware that most of the insurers provide a tax helpline and can (or, in some cases, insist that the insurers) undertake the related professional work to defend a client from an HMRC challenge. And such helplines and tax support services are in direct competition with the facilities provided by my Tax Advice Network.

Anyway the function of this blog is to share commercial tips and advice for accountants so when I become aware of services and facilities that I think may be of interest it behoves me to share this.

In this connection I’m aware of a number of the available policies that are ‘out there’ and of some new ones about to be launched. I’m also aware that different accountants have differing views as to the value of such policies. I think the alternative views can be summarised as follows:

• Can’t see the need for it. Very few of my clients suffer full investigations and that’s all these things cover isn’t it?
• Tried it once but cancelled when the insurers wouldn’t pay out on a claim;
• Happy to tell clients about this and let them decide whether to take out a policy or not;
• I want my clients to be covered so that I can be confident that my fees will be covered in the event of an investigation;
• Most of my clients are members of the FSB and so they have cover through that scheme;
• Our firm is so large that it’s hard to formulate a consistent approach that would satisfy the insurers;
• We make a good return on the premiums that we sell to our clients – in effect by providing an additional valuable service to our clients we also benefit through an additional and profitable residual income stream;

I’d be interested to learn the views of the readers of this blog.

NB: I heard about an 8 partner firm today where only 4 of the partners tell their clients about the availability of fee insurance. I tend to think that such a firm may be at risk of invalidating their PI policy. One of the standard terms tends to be that clients will be given ‘best advice’. How secure are they if half of the firm’s clients receive advice that the other half don’t receive?

I created this list recently for a forthcoming article in the professional press. It’s drawn from my talk, How to avoid tax related professional negligence claims, which I have been presenting all over the UK for the last few years.

1 – When providing tax advice always state the known facts on which your advice is based – in writing;

2 – Equally state any assumptions you have made – in writing;

3 – Create contemporaneous notes of all material advice and of the assumptions you provide during meetings and telephone conversations;

4 – When advising, ask yourself whether you’d be happy for a close friend or family member to rely on the advice. If you’re not sure, do additional research, get a second opinion or involve a tax specialist colleague or trusted third-party (such as a member of the Tax Advice Network)

5 – When advising clients of forthcoming deadlines, focus their attention on the date that you need to the information to beat the statutory deadline;

6 – Avoid under-pricing work and introducing time-pressure that could exacerbate mistakes;

7 –Stick to what you know. If a client requires or requests advice on subjects outside of your comfort zone, involve a tax specialist colleague or trusted third-party (see above!);

8 – Stop working for those clients who are more trouble than they are worth. These are the clients who resist paying decent fees, don’t contribute to the growth of your practice and who are most likely to complain, given half a chance.

9 – Manage client expectations and avoid over-promising and under-delivery. Remember that a client’s perception of these may be very different from yours.

10 – Keep uptodate – eg: with the free weekly email containing practical topical tax tips for accountants in general practice from the Tax Advice Network.

There’s an interesting discussion on AccountingWeb as to whether an accountant could be held to be negligent for not advising clients about ‘advanced tax planning’ (ie: tax avoidance strategies).

As I explain when I present sessions on How to avoid tax related negligence claims, the standard of care to which you will be held is that of a ‘reasonably competent accountant’. I also stress that there is more to this than simply having a good defence.  You really want to avoid the claims being made as it’s a rotten process to go through – even if you are exonerated at the end.

Assume for a moment that an (ex) client alleged that their accountant had been negligent for not mentioning certain ‘advanced tax planning’ ideas, what would that claimant need to evidence to win their claim?

1 – That the accountant owed a duty of care – the client/accountant relationship probably satisfies that.

2 – That there was a breach of that duty of care (I’ll come back to that in a moment); and

3 – That the client has suffered a loss as a direct result of that breach.

As indicated above, the defence would be that the the accountant did nothing less than a reasonably competent accountant would have done. Is it a breach of the duty of care to choose NOT to mention ‘advanced tax planning’ ideas? in my view it is not (in general). And I say that in the capacity of someone who has acted as an expert witness in cases involving the alleged professional negligence of accountants.

In my view there is a material difference between ‘everyday’ tax planning, that most decent accountants would address and ‘advanced’ tax planning ideas.

Of course, if a client’s circumstances changed materially, (eg they stood to realise an enormous capital gain) or they ASKED for more sophisticated advice and did not get it then a claim might subsequently succeed. However the client would need to prove that there was a ‘scheme’, technique or facility by which they could have reduced their tax bills and that they would have been prepared to undertake the necessary transactions and pay the related fees. If they can prove that THEN there might be a case against an otherwise reasonably competent accountant.

Although not completely beyond doubt it is important to appreciate that a reasonably competent accountant probably complies with the Guide to Professional Conduct for those working in tax. It’s the same Guide for all of the professional bodies. It includes a requirement to seek expert support or help if clients want tax advice that goes beyond your comfort zone. If an accountant chooses to not give the required advice rather than outsource it they could be held to be negligent.

I regularly encourage accountants to ditch their bad clients. There are two primary reasons for this.

- Following the Pareto (80/20) principle, you can be sure that your worst clients (however small the number) cause the bulk of the problems and hassle that you suffer. Conversely, 80% of your profits are probably generated by the top 20% of your clients.  I first commented on this concept last October.

- The complaints from and problems caused by your worst clients are more likely, than your best clients,  to end up as professional negligence claims or reports to your professional body for unprofessional conduct.

What counts as a bad client?

Let’s see if we can create a definitive list.  I’ll start with the examples I share during my talks for accountants.  Readers are encouraged to add their own  suggestions as comments.

On my list would go clients who display 2 or more of the following tendancies:

Before they become clients

• Evidently expect free advice on the phone;
• Reluctantly attend a meeting and seek further free advice;
• Challenge elements of your standard terms and conditions;
• Resist producing suitable identity verification evidence;
• Delay signing your engagement letter whilst expecting you to start work;
• Mentions that they have sued or reported one or more of your predecessors;
• Resist making any form of up front payment (where this is part of your terms)

After being engaged:

• Seeks further advice but is unwilling to accept that this will increase your fees;
• Changes the scope of your work;
• Resists any increase in your fee to reflect additional work they have requested [nb: I'm assuming that you would notify them of the increase before starting the extra work] ;
• Appears not to value your time;
• Insists on ‘gut feel’ advice rather than fully researched advice;
• Uses buzz words and terms that they evidently don’t really understand;
• Regularly needs to be chased up to provide information or other responses to your enquiries;
• Delays production of key documents until the last minute;
• Does not pay your fees in accordance with your payment terms.

I was intrigued by a piece in the paper today about Heather Mills being sued by her divorce lawyers for non-payment of her legal fees and that she may launch a counter-suit. According to a ‘source’:

“There is a possibility of Heather Mills counter-suing. Whatever she owes [the lawyers] – whether it’s  £1 million or £2 million – one would have expected her to get something for it.  There has been no divorce settlement and no outcome over all this time.”

This got me thinking. How much can professionals charge for giving advice that does not secure the desired result?

It’s not as easy as that of course. In litigation, for example, only one of the parties can win but both sides will have to pay their lawyers.  Negotiations with HMRC will not always result in them going away empty handed. Not all tax planning will achieve the hoped for outcome.  And of course the terms of one’s engagement will normally make clear that fees are payable on the agreed basis regardless of the outcome of the adviser’s efforts.

But there are also plenty of occasions where a professional adviser’s fees are dependent upon the outcome of the work undertaken.  Corporate financiers for example will often only get paid if their efforts to secure finance or a listing are successful – if not all their fees are at risk, certainly a large proportion will be.  If they are successful they will effectively benefit from a success fee – to compensate for the number of occasions that they are unsuccessful.

Is this comparable with the salesman at John Lewis who spends time helping all prospective purchasers even though  John Lewis only generates cash (to pay salaries) if a sale is actually made?

What do your clients get for their money? Is this apparent even when the final outcome of your work is perhaps not what they might have wanted?  Or are you in danger of being counter-sued by an unhappy client if you sue for non-payment of your fees?  Setting expectations at the outset is critical of course – oh, and be wary of celebrities!

I’ve just cut the following from a draft article I’m writing for a tax careers publication. The essential points are relevant across all disciplines.

Years ago when I joined a new firm I remember an audit partner telling me about two tax managers in his team He preferred ‘Dana’ because she always knew the answers. He didn’t like ‘Sarah’ as much because she was never sure of anything and always wanted to check with a tax partner.

I expressed the view that ‘Sarah’ was probably the better tax adviser as she was more cautious. ‘Dana’ was probably more dangerous as it was likely that she was overstating her real knowledge if she never needed to seek a second opinion. Armed with this new insight the audit partner became more open minded and within a few months he found that ‘Dana’ had indeed been covering up her mistakes and creating problems for the future.

The fact is that audit partners and general practitioners generally want their staff to be constructive and commercial. Being cautious is good upto a point but ultimately it is the partner who makes the decisions. If you are always overly cautious you may be seen to be uncommercial. So you need to develop confidence in your own knowledge and ability but this should not come from bravado.

It is generally the partners or the business owner who should decide on the level of risk they want to take when it comes to advising clients. This means that ambitious professionals should never present unresearched technical advice as if it were gospel. So, even if you have to advise in a hurry, qualify your advice if it is unchecked. At worst you will be given more time to research things. At best the person who runs the practice or the department can decide whether further research is required.