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Insurance for auditors

Mohan R. Lavi

The Professional Fees Insurance scheme assures that the auditor's fees are not jeopardised.

These are not normal days for the auditing profession. With the limelight focused on them thanks to regulations, such as the Sarbanes Oxley Act in the US and the revised Clause 49 of the Listing Agreement in India, auditors keep coming into the news every now and then. A major firm was forced to wind up operations post-Enron while other firms are being inspected at regular intervals. While there have, thankfully, been no more major collapses, there can be no doubt in the fact that auditors are being much more careful nowadays. For more than 12 years now, insurers in England have devised a manner in which auditors could protect themselves through the familiar route — insurance.

Labelled Professional Fees Insurance (PFI), the scheme assumes that the auditor may not only be the first to be blamed but also the last to be paid for work that results in an increasing number of tax authority investigations, but assures that the fees are not jeopardised. The schemes now cover income tax and corporate tax, full and aspect enquiries, VAT disputes and employer compliance disputes. The schemes vary but most of them offer insurance to the firm as a whole or for identifiable fees.

In certain cases, the client can also be insured with or without a specific recommendation. In certain types of policies, the firm may charge the client a fee for the service with an add-on to cover the cost of the policy to the firm and its administration costs. The client, in such instances, only acquires an interest in the contract but has no rights against the insurer but might be able to require the firm to make a claim. In case there is an enquiry, the firm may, carry out the assignment and in case the insurance cover is insufficient, recoup the shortfall from the client. In certain types of policies, the client could also be the policy-holder in order that the risks are shared.

The advantages of such policies are tabulated below:

For the firm: Fees are recoverable; insurer pays the fees promptly;

cash flow advantage; tax deduction on premiums paid; professional indemnity premiums reduce; freedom to pursue other fee-earning activities

For the client: Protection for fees; equality in defending positions;

cover on group policy.

Right now, in India, we have only professional indemnity policies and that too from select insurers. Most of these policies are subject to many terms and conditions which could make a claim a time-consuming process. We could expect the market to develop and see innovative policies for specific activities of an auditing firm sooner rather than later.

(The author is a Hyderabad-based chartered accountant.)

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