Rising insolvencies lead to surge in professional indemnity claims

Professional indemnity claims are on the rise as a result of the rise of insolvencies as accountants are placed into the firing line, warned a lawyer.

Marlene Henderson, a partner at Brown Jacobson, told City A.M. she is seeing an uptick of these types of claims, particularly against accountants, when a company goes into insolvency.

She explained when a company goes insolvent, “the liquidator/administrator invariably scrutinises the decisions made” which sees the “decisions that the directors have made get picked on.” She added that once the directors are in the “firing line”, they turn “their fire onto their accountants”.

She also highlighted that “equally liquidators are going after accountants themselves or just putting everyone in the one net.”

According to recent data published by the UK Insolvency Service, the number of firms going bust has risen to its highest level since 2009, at the height of the financial crisis. While the latest Red Flag Alert report from Begbies Traynor said during the third quarter of the year, 37,722 UK companies were critical financial distress. The report also noted that almost 480,000 were in ‘significant’ financial distress.

Henderson also highlighted the challenging economic climate, which “promotes fraudulent behaviours.” She attributed the current economic climate to a rise in claims linked to dishonesty or misappropriation of funds.

She noted accountants are defending claims for missing these ‘frauds,’ even if they didn’t audit the accounts for the business. Henderson said accountants are told “the fraud was so obvious you should have spotted it anyway.”