The unpredictable times we’re living in create both opportunity and uncertainty for the accounting profession. That’s why mitigating against risk in your practice is increasingly important. 

If there’s been a misunderstanding that leads to a client making a claim against you, or an omission in your advice, it’s critical to limit what you’re liable for. 

This is where CA ANZ’s Professional Standards Scheme can help provide an extra layer of protection for members in Australia.

Why the scheme’s protection is a key part of your risk management plan

CA ANZ’s Professional Standards Scheme is approved under professional standards legislation. This legislation is designed to limit (cap) how much can be awarded in a legal claim against you. That cap depends on the size and nature of the service you provided. 

The scheme means: 

• you have a risk management safety net, which is particularly helpful for practitioners with large risk exposures
• your clients know your liability will be limited, so the path to dispute settlement may be easier, avoiding court
• you have funding available to compensate your clients if needed. 

“If you’re planning to stop providing services at a practice you need to have run-off cover in place for your past seven years of work.”

Do these three checks 

Only a court can determine if, based on the facts and circumstances for every claim, the scheme will apply. However, there are three checks you can do to maximise the likelihood of a positive decision by the court. 

Check 1: Do you hold a Certificate of Public Practice, Affiliate or a Practice Entity membership of CA ANZ?

It’s important to make sure that you hold the right type of membership for your circumstances. If you’re a CA ANZ member, resident in Australia, and a principal in a practice that provides accounting services to the public for reward, you must hold a Certificate of Public Practice. A principal in your practice who is not a CA ANZ member can usually become an affiliate member.  

You are considered a principal if you are:

• a director of a corporate practice, partner in a partnership or a trustee of a trust, or
• responsible for:
  • client selection, retention and terms of engagement
  • the type and quality of services provided by your practice
  • ethical and technical judgements, and
  • governance of the practice and related entities.

Check 2: Is your scheme disclosure statement clear?

Your engagement letters and business stationery, including emails and webpages, must include this statement printed in a size not less than Times New Roman 8 point font:

‘Liability limited by a scheme approved under Professional Standards Legislation.’ 

Check 3: Is your professional indemnity insurance cover adequate? 

Your practice’s professional indemnity cover must fit the work you perform, your fees and your billing cycle. 

If your insurance cover is inadequate, the scheme may not protect you if a client makes a claim against you. Adequate is defined as:

a) Having the right excess

Check that your practice’s professional indemnity insurance policy has an excess or deductible equal to or less than either of the following two amounts:

A. The greater of:

i. the amount calculated by multiplying the number of principals of the practice at the beginning of the period of insurance by $10,000;
OR
ii. 3% of the total gross fee income of the member and every related entity for the financial year immediately preceding the beginning of the period of insurance.
AND

B. 5% of the indemnity cover required in CR 2A.5(e).

Here’s an example 

A four-partner practice has a $4,000,000 turnover and the biggest annual fee is $200,000.  
Ai = 4 x $10,000 = $40,000
Aii = 3% x $4,000,000 = $120,000
The greater of Ai and Aii is $120,000
B = 5% x $5,000,000 = $250,000.

Therefore, the maximum acceptable excess is $120,000, being the lesser of A and B.

b) Covering your legal and defence costs

Since defence costs can be enormous, make sure your cover protects your practice for claims as well as legal and defence costs. 

Generally, there are two types of policies: 

• Costs in addition policies cover legal and defence costs in addition to the cover for settling claims. 
• Costs inclusive policies where the cover for legal and defence costs is included in the policy limit.

For costs inclusive policies, CR 2A requires cover to be at least 25% greater than a costs in addition policy. This allows for legal and defence costs of 25% of the claim amount.

Here’s an example 

A practice’s highest annual fee is less than $100,000. Cover of $2,000,000 on a costs in addition basis is required to settle claims. The policy covers defence costs in addition to the claim amount. Alternatively, the practice may take out a costs in addition policy for $2,500,000 to cover both the claim and the defence costs.

Practices with costs in addition cover should check if there’s a limit on the cover for defence costs, and make sure that limit is at least 25% more than the minimum cover required to settle claims.

c) Covering your last seven years of practice

If you’re planning to stop providing services at a practice, you need to have run-off cover in place for your past seven years of work. 

Organise this cover before you stop providing services because retrospective cover is not usually available.

If you have left a practice that’s still active, it’s likely the practice will hold cover to satisfy this requirement, but you’ll need to check. 

CR 2A requires that any person who has ever been a principal or employee of the practice or related entity is included under the practice’s professional indemnity insurance policy.

d) Covering all the services provided by your practice

The scheme covers financial planning, financial services, tax, audit, accounting, bookkeeping and liquidation services. Check with your insurance broker that your professional indemnity insurance adequately covers all these services, as set out in paragraph 2A.5 of CR 2A. 

e) Ensuring all principals in your practice are covered

Adequate professional indemnity cover is required for all members who are acting as principals in Australia. When you take on a new principal, take care that they and all the services they offer are covered in your policy.

While CA ANZ’s Professional Standards (Limitation of Liability) Scheme helps to protect you if a client makes a claim against you, make sure to regularly check your eligibility so that you can access the scheme if you need to.