Accountants and financial services professionals are being reminded to review their levels of professional indemnity insurance and approaches to risk management, as CPA Australia confirms there will likely be a gap between the expiration of its current professional standards scheme and the renewal of a new one.
Fairfax reports CPA members in Victoria could lose some of their protections against malpractice lawsuits that are provided by the accounting body’s professional standards scheme, because of a situation in which the Professional Standards Council (PSC), the body that approves Australian professional standards codes, has put the pause button on renewing CPA’s standards framework, which is set to expire in October.
The CPA’s professional standards scheme applies in all Australian states except Tasmania. Members who are covered by the scheme are required to demonstrate risk management frameworks and take out the appropriate level of professional indemnity insurance according to a strict set of criteria.
While members are responsible for taking out their own professional indemnity insurance, the benefit of being part of the professional standards scheme lies in being covered by CPA Australia’s limited liability, which caps the amount members are liable for in the event of a legal claim against a practice.
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These caps depend on the size and the number of practitioners within a business.
According to Fairfax reports, the renewal of the CPA scheme has stalled because the New South Wales government, which is ultimately responsible for signing off on this type of professional standards scheme, is examining whether the CPA’s recently established financial services offering could interfere with the association’s ability to discipline members around compliance, which is a requirement of the scheme.
In a statement provided to SmartCompany, CPA Australia spokesperson Stuart Dignam said the Professional Standards Council has sought more information about the operation of the association’s financial advice arm.
“The PSC is seeking additional information in relation to CPA Australia’s status as an occupational association as a result of the establishment of the subsidiary CPA Australia Advice Pty Ltd,” Dignam said.
Dignam confirmed that given the timing of the review, it was likely there will be a gap in the schemes, which would affect at least CPA members in Victoria.
“Depending on the timing of the PSC’s consideration of further information there is the possibility other states and territories where a scheme is in place may also be affected,” he said.
CPA Australia says it will commence more detailed communication with members about the impact of the situation from next Tuesday.
“This communication will include advice in relation to usage of limited liability disclosure statements and guidance on other appropriate risk management strategies,” Dignam says.
The association highlights there will be no change for consumers or the general operations of businesses because the terms of professional indemnity insurance taken out by accountants remains unchanged.
Accountants face complexity
When SmartCompany asked accountants how they formulate risk management plans this morning, the complexity of insurance coverage at an appropriate level was raised, particularly for SMEs.
One financial practitioner told SmartCompany insurance coverage in the industry tends to be much more expensive in real terms for small businesses, with member organisations either advising or compelling professional indemnity coverage of up to millions of dollars even if a member is a sole trader.
Becoming a member of a professional organisation can give accountants access to caps on the amount clients can claim against them in malpractice suits, as well as allowing access to that member organisation’s insurer, which can provide better deals than what would otherwise be available.
However, accountants tell SmartCompany caps to liability are of great importance because insurers can be reluctant to give coverage at the limits that a business actually reasonably requires, so a membership can potentially bridge that gap by limiting the amount clients can claim against them.
CPA Australia advises that no matter what scheme is in operation, there is no replacement for risk management procedures on the ground at individual businesses.
“PSC schemes do not replace or reduce the obligation of professionals to have established risk management frameworks and hold appropriate levels of Professional Indemnity Insurance (PII),” Dignam says.
The accounting association’s public advisory committee and insurance working group will meet next Monday to sign off on material for its members about the next steps forward and the status of the new scheme.