Doom and gloom for professional investment and auditing firms?
South Africa is aligning itself with the rest of the international community’s legal inclination and becoming an ever more litigious country. With attorneys doing work on a contingency, or a “no win, no fee” basis, it is becoming easier and easier to sue and hold a wrongdoer liable.
According to Legal Risk Advisor, Samantha Baleson of Aon South Africa, the working professional faces many challenges and obstacles when executing their job or mandate. “Primary to that is the duty and responsibility that they hold towards their clients, regardless of whether or not they have a contract with those clients and regardless of a fee being charged.”
The South African law uses a benchmark to test negligence, being the reasonable person test, i.e. what would a similar person, in a similar situation have done? “However, when a professional is being questioned, the yardstick used, becomes ‘the reasonable expert test’- the standard required being much higher. i.e. what would a similarly qualified professional or expert, with a similar set of skills, experience, and qualifications have done in a similar situation? If the conduct of the professional falls short of that, it can be said that he or she acted negligently,” Baleson explains.
According to the Harvard business law review, an expert is defined as a person that has accumulated more than 3000 hours of time on any given field of discipline, this includes study time. In South Africa, a qualification and the amount of experience in the field will be considered when determining the level of expertise.
“The decisions that professionals make on a daily basis have the potential to have a detrimental, longstanding and irreparable negative impact on a client and their business,” says Baleson.
“When such a party or client suffers harm or a loss as a result of a professional’s negligence then they are entitled in law to what is known as damages, again, regardless of whether or not they are a paying client and regardless of whether or not they have a written agreement with you,” Baleson adds.
“A practical example could be when a tax practitioner or accountant negligently fails or omits to timeously submit a tax return on behalf of a client or fails to complete annual financial statements within the required timeframe,” she illustrates.
“It is for this very reason that it is essential for such professionals to have and maintain their own professional indemnity cover in the event of negligent errors and omissions. In the absence of such a policy, the professional or even the professional firm will suffer the loss, and will either be liquidated or have to pay for such losses out of their own bottom-line,” explains Baleson.
This issue has been brought to light recently with the media exploding with headlines painting a picture of doom and gloom for professional investment and auditing firms who are subject to potential class-action lawsuits, as aggrieved investors attempt to recover their losses as a result of a plunge in share price. It is highlighting the extent of legal action that can be taken on the basis of incorrect and misleading financial statements that are published.
Large auditing firms have more recently been the test case for holding power to account for their involvement in what is being labeled as private sector corruption.
“Aon’s professional indemnity policies primarily provide cover for the negligent acts, errors, and omissions of professionals acting in the course and scope of their employment/ providing professional services. Aon’s policies also keep abreast of trends in the potential risk exposure of the insured and have specifically designed their extensions to cater for these risks. Such extensions are tailormade to cover a variety of risks, which include for example legal criminal and statutory defense costs for the defense of any criminal action brought as a result of contravening any statute governing the conduct of the business,” says Baleson.
“Another valuable extension being Directors and Officers (D&O) liability where the directors and officers of companies can be held liable in their personal capacity and in terms of the fiduciary duty that they owe towards their company. Liability can always ensue in terms of the Companies Act; the extension will cover the cost and expenses where a director becomes legally liable to pay damages for wrongful acts,” she adds.
Further examples of these extensions include business identity theft and computer crime.
“It is important to note that all extensions are, however, limited and subject to exclusions,” Baleson warns.
“It is imperative for all professionals across the board, including the financial advisory sector, to consider their risk exposure and embark on a proactive and sound risk management strategy with a professional insurance broker by their side, to advise of any exclusions and build a well-rounded insurance solution for themselves and for their business,” Baleson concludes.
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