Impact of the  Economic Crisis on Traditional Professionals San Diego, CA  ~  April 29 & 30, 2009
Impact of the  Economic Crisis on Traditional Professionals <ul><li>Moderator:  John Iannotti </li></ul><ul><ul><li>Everes...
<ul><li>Underwriters’ Perspective </li></ul><ul><ul><li>Professional Services Firms </li></ul></ul><ul><ul><li>Accounting ...
Professionals’ Exposure Changes Driven by the Economy <ul><li>Challenged financial condition of the professional firm  </l...
Professionals’ Exposure Changes Driven by the Economy  (cont’d) <ul><li>Staff reductions driving down the quality of their...
Professionals’ Exposure Changes Driven by the Economy  (cont’d) <ul><li>When Professional firms file for bankruptcy: </li>...
Professionals’ Exposure Changes Driven by the Economy  (cont’d) <ul><li>Financial condition of clients </li></ul><ul><li>I...
Professionals’ Exposure Changes Driven by the Economy  (cont’d) <ul><li>Professional Services: trustee in bankruptcy </li>...
Professional Liability Underwriting Impact <ul><li>Need to analyze the professional firm’s financials  </li></ul><ul><li>M...
Impact of the Economic Crisis on Accountants <ul><li>Sub-prime </li></ul><ul><li>Credit crisis, recession and Ponzi scheme...
Impact of the Economic Crisis on Accountants <ul><li>Timing </li></ul><ul><ul><li>Impact to CPA firms delayed due to “tric...
Impact of the Economic Crisis on Accountants <ul><li>Effect on Areas of Practice </li></ul><ul><ul><li>Consulting work lik...
Impact of the Economic Crisis on Accountants <ul><li>Increased competition: “reverse” cascade effect…..here comes the Big ...
Impact of economic downturn on APL <ul><li>How will small firms react? </li></ul><ul><ul><li>“ My book of business” </li><...
Impact of the Economic Crisis on Accountants <ul><li>Retirements, mergers and acquisitions </li></ul><ul><ul><li>What reti...
Impact of the Economic Crisis on Accountants <ul><li>Summary- </li></ul><ul><li>Increased frequency </li></ul><ul><ul><li>...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><li>Ap...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><l...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><l...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><l...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><li>Ra...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Appraiser Professional Liability </li></ul><ul><ul><li>...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Appraiser Professional Liability </li></ul><ul><ul><li>...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Broker Price Opinions (BPOs) </li></ul><ul><ul><li>A ch...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Broker Price Opinions (BPOs)  could  be the cause of de...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Mortgage Broker Professional Liability </li></ul><ul><l...
Impact of the Economic Crisis on Real Estate Professionals <ul><li>Mortgage Broker Professional Liability </li></ul><ul><l...
Impact of the  Economic Crisis on Traditional Professionals <ul><li>Especially  </li></ul><ul><li>Ponzi Schemes Impact on ...
<ul><li>Auditors or professional advisors of any Madoff investor stand a good chance of becoming a defendant. </li></ul><u...
<ul><li>Madoff’s auditor- </li></ul><ul><li>Friehling & Horowitz </li></ul><ul><ul><li>Three person operation: </li></ul><...
WHO IS AT RISK? <ul><li>CPAs and lawyers that served as trustees, and personal representatives of estates and foundations ...
POTENTIAL PLAINTIFFS <ul><li>Entities that invested directly with Madoff will seek to recoup their losses (educational and...
POTENTIAL PLAINTIFFS <ul><li>Individual investors will likely take aim at their accountants who offered investment advice ...
WARNING SIGNS <ul><li>Recent lawsuits allege that feeder fund auditors failed to notice red flags: </li></ul><ul><ul><li>M...
<ul><ul><li>Madoff did not have an  independent custodian  hold its investment securities </li></ul></ul><ul><ul><li>Madof...
HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK <ul><ul><li>Miami Circuit Court –  </li></ul></ul><ul><ul><li>Filed April...
HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK  <ul><li>American Express recommended two Madoff funds  </li></ul><ul><li...
<ul><li>The lawsuit includes allegations of: </li></ul><ul><ul><li>Negligence </li></ul></ul><ul><ul><li>Breach of fiducia...
GOLDBERG V. NATIONAL CPA FIRM <ul><li>Filed in Miami Circuit Court on March 30, 2009 </li></ul><ul><li>Plaintiffs lost app...
GOLDBERG V. NATIONAL CPA FIRM <ul><li>Plaintiff allegations include: </li></ul><ul><ul><li>Demand for an Accounting of all...
NEW CENTURY FINANCIAL CORP V. KPMG INTERNATIONAL AND LLP <ul><li>Filed April 1, 2009 – among the first attempts to blame a...
NEW CENTURY FINANCIAL CORP V. KPMG INTERNATIONAL AND LLP <ul><li>KPMG performed financial statement audits of New Century ...
Questions? <ul><li>Please let us know who should address your question. </li></ul>
Thanks! <ul><li>We appreciate your attendance! </li></ul>
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Impact of the Economic Crisis on Traditional Professionals

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Presented at the 2009 PLUS PRS Symposium in San Diego, CA

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Transcript of "Impact of the Economic Crisis on Traditional Professionals"

  1. 1. Impact of the Economic Crisis on Traditional Professionals San Diego, CA ~ April 29 & 30, 2009
  2. 2. Impact of the Economic Crisis on Traditional Professionals <ul><li>Moderator: John Iannotti </li></ul><ul><ul><li>Everest National </li></ul></ul><ul><li>Mark Henderson, J.D. </li></ul><ul><ul><li>Markel Corporation </li></ul></ul><ul><li>Jeff Day, CPCU </li></ul><ul><ul><li>CNA </li></ul></ul><ul><li>Brian E. Cropp </li></ul><ul><ul><li>V. O. Schinnerer </li></ul></ul><ul><li>H. Steven Vogel, Esq. </li></ul><ul><ul><li>Wilson Elser Moskowitz Edelman & Dicker </li></ul></ul>
  3. 3. <ul><li>Underwriters’ Perspective </li></ul><ul><ul><li>Professional Services Firms </li></ul></ul><ul><ul><li>Accounting Firms </li></ul></ul><ul><ul><li>Real Estate Professionals </li></ul></ul><ul><li>Claim Defense Perspective </li></ul><ul><ul><li>What the economic crunch has changed </li></ul></ul>
  4. 4. Professionals’ Exposure Changes Driven by the Economy <ul><li>Challenged financial condition of the professional firm </li></ul><ul><li>Acceptance of work for firm’s survival </li></ul><ul><ul><li>Lax screening for conflict of interest </li></ul></ul><ul><ul><li>Lax consideration of firm’s core expertise </li></ul></ul><ul><ul><li>Lax consideration of locale of work and firm’s knowledge of that locale </li></ul></ul><ul><ul><li>Lax risk management </li></ul></ul>
  5. 5. Professionals’ Exposure Changes Driven by the Economy (cont’d) <ul><li>Staff reductions driving down the quality of their work </li></ul><ul><li>Projects where banks have pulled funding </li></ul><ul><ul><li>Professional firms and contractors have filed liens </li></ul></ul><ul><ul><li>Banks are suing lien holders to claim right to property </li></ul></ul>
  6. 6. Professionals’ Exposure Changes Driven by the Economy (cont’d) <ul><li>When Professional firms file for bankruptcy: </li></ul><ul><ul><li>Projects/clients left in the lurch </li></ul></ul><ul><ul><li>Owners bringing legal action - Professional Liability Insurance Limits of Liability become an asset of the bankruptcy estate </li></ul></ul>
  7. 7. Professionals’ Exposure Changes Driven by the Economy (cont’d) <ul><li>Financial condition of clients </li></ul><ul><li>Insolvency/bankruptcy of a client </li></ul><ul><ul><li>Large damage backdrops </li></ul></ul><ul><ul><li>Potential for liability to owners, shareholders and other constituents </li></ul></ul><ul><ul><li>The longer the relationship had been, the larger the potential exposure </li></ul></ul>
  8. 8. Professionals’ Exposure Changes Driven by the Economy (cont’d) <ul><li>Professional Services: trustee in bankruptcy </li></ul><ul><li>Lucrative but highly contentious </li></ul><ul><li>Target for class action litigation </li></ul>
  9. 9. Professional Liability Underwriting Impact <ul><li>Need to analyze the professional firm’s financials </li></ul><ul><li>Monitor press on major publicly held clients </li></ul><ul><li>Need ever greater integration of business intelligence sources </li></ul><ul><ul><li>Less underwriting intelligence means higher risk level </li></ul></ul>
  10. 10. Impact of the Economic Crisis on Accountants <ul><li>Sub-prime </li></ul><ul><li>Credit crisis, recession and Ponzi schemes </li></ul><ul><li>Going concerns </li></ul><ul><li>Business bankruptcy </li></ul><ul><li>Tax enforcement & collection activity </li></ul>
  11. 11. Impact of the Economic Crisis on Accountants <ul><li>Timing </li></ul><ul><ul><li>Impact to CPA firms delayed due to “trickle down” effect </li></ul></ul><ul><ul><li>Full impact won’t start to be felt until after tax season </li></ul></ul>
  12. 12. Impact of the Economic Crisis on Accountants <ul><li>Effect on Areas of Practice </li></ul><ul><ul><li>Consulting work likely to decline </li></ul></ul><ul><ul><ul><li>Exceptions: Bankruptcy, Business Valuation, Litigation Support </li></ul></ul></ul><ul><ul><li>Many small businesses will fail </li></ul></ul><ul><ul><ul><li>Loss of bookkeeping, compilation & tax services </li></ul></ul></ul><ul><ul><li>Tax and audit work remain core services </li></ul></ul><ul><ul><ul><li>However, clients looking to “trade down” to review </li></ul></ul></ul>
  13. 13. Impact of the Economic Crisis on Accountants <ul><li>Increased competition: “reverse” cascade effect…..here comes the Big 4! </li></ul><ul><li>Lost billings will pressure firms on: </li></ul><ul><ul><li>Expense management </li></ul></ul><ul><ul><li>Client acceptance and continuance </li></ul></ul>
  14. 14. Impact of economic downturn on APL <ul><li>How will small firms react? </li></ul><ul><ul><li>“ My book of business” </li></ul></ul><ul><ul><ul><li>Owners protective of their clients </li></ul></ul></ul><ul><ul><ul><li>More likely to allow delinquencies to mount </li></ul></ul></ul><ul><ul><ul><li>More likely to act as client advocate and attempt to assist with financing </li></ul></ul></ul><ul><ul><ul><li>More likely to SUE FOR FEES when they hit “crisis” mode </li></ul></ul></ul><ul><ul><ul><li>Delay in retirement </li></ul></ul></ul>
  15. 15. Impact of the Economic Crisis on Accountants <ul><li>Retirements, mergers and acquisitions </li></ul><ul><ul><li>What retirement? “Work until you drop” </li></ul></ul><ul><ul><li>Many mid-sized firms will seek to be acquired, but few will be </li></ul></ul><ul><ul><li>Likely “shakeout” among small regional firms </li></ul></ul><ul><ul><ul><li>Some will shrink; a few may even break up </li></ul></ul></ul><ul><ul><ul><li>Some will be acquired by larger regional firms </li></ul></ul></ul>
  16. 16. Impact of the Economic Crisis on Accountants <ul><li>Summary- </li></ul><ul><li>Increased frequency </li></ul><ul><ul><li>Subpoena assistance, potentials, and actuals going up </li></ul></ul><ul><li>Increased severity </li></ul><ul><ul><li>Business bankruptcies and ponzi schemes </li></ul></ul><ul><li>Increased competition; flat or declining billings </li></ul><ul><ul><li>Competition increases “dabbling”, pressure on client acceptance/continuance, and work quality issues </li></ul></ul><ul><li>Increased insurance price sensitivity </li></ul><ul><ul><li>Requests for lower limits, higher deductibles </li></ul></ul><ul><ul><li>Some small firms have gone bare </li></ul></ul>
  17. 17. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><li>Appraisers Professional Liability </li></ul><ul><li>Mortgage Broker Professional Liability </li></ul>
  18. 18. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><li>Stagnant Housing </li></ul></ul><ul><ul><li>Foreclosures </li></ul></ul><ul><ul><li>Bank-Owned Properties </li></ul></ul>
  19. 19. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><li>Rating basis </li></ul></ul><ul><ul><ul><li>Number of Agents/Brokers </li></ul></ul></ul><ul><ul><ul><li>Gross Commission Income </li></ul></ul></ul>
  20. 20. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><ul><li>Rating basis </li></ul></ul><ul><ul><ul><li>Number of Agents/Brokers </li></ul></ul></ul><ul><ul><ul><ul><li>Many employees are leaving to find greener pastures </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Commissions and number of sales are decreasing </li></ul></ul></ul></ul>
  21. 21. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Real Estate Professional Liability </li></ul><ul><li>Rating basis </li></ul><ul><ul><li>Commission Sales </li></ul></ul><ul><ul><ul><li>Turn in marketplace causing premiums to decrease </li></ul></ul></ul><ul><ul><ul><li>Writing new business with prior acts will pick up exposures from prior years </li></ul></ul></ul>
  22. 22. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Appraiser Professional Liability </li></ul><ul><ul><li>Rating basis </li></ul></ul><ul><ul><ul><li>Fees/number of appraisals </li></ul></ul></ul><ul><ul><li>Exposures- </li></ul></ul><ul><ul><ul><li>Appraisers pressured to “hit the price” to help sales go through </li></ul></ul></ul>
  23. 23. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Appraiser Professional Liability </li></ul><ul><ul><li>Severity of claims </li></ul></ul><ul><ul><li>Some companies are getting out of the market </li></ul></ul><ul><ul><li>Others are limiting coverage </li></ul></ul>
  24. 24. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Broker Price Opinions (BPOs) </li></ul><ul><ul><li>A cheaper way for banks to get the value of a home instead of using a certified appraiser </li></ul></ul><ul><ul><li>Legislation in many states are requiring BPOs be performed by certified appraisers </li></ul></ul>
  25. 25. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Broker Price Opinions (BPOs) could be the cause of decreasing home values. </li></ul><ul><ul><li>Incentive to undervalue short sales, foreclosures </li></ul></ul><ul><ul><li>Inherent conflicts of interest: </li></ul></ul><ul><ul><ul><li>(Want to) sell property fast </li></ul></ul></ul><ul><ul><ul><li>Want additional BPO and property listings from bank </li></ul></ul></ul><ul><ul><ul><li>Many sales to investors, at depressed prices, become the comparables for appraisers </li></ul></ul></ul><ul><ul><li> Washington Post, March 28, 2009 </li></ul></ul>
  26. 26. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Mortgage Broker Professional Liability </li></ul><ul><li>Rating basis </li></ul><ul><ul><li>Revenue/number of mortgages </li></ul></ul>
  27. 27. Impact of the Economic Crisis on Real Estate Professionals <ul><li>Mortgage Broker Professional Liability </li></ul><ul><li>Sub Prime mortgage earlier this decade created some claims </li></ul><ul><ul><li>No Money Down </li></ul></ul><ul><ul><li>No Documentation for Loans </li></ul></ul><ul><ul><li>Mortgagees were under-qualified for mortgages they were offered </li></ul></ul><ul><ul><li>Buyers not able to afford house for loan size offered by mortgage broker </li></ul></ul>
  28. 28. Impact of the Economic Crisis on Traditional Professionals <ul><li>Especially </li></ul><ul><li>Ponzi Schemes Impact on Accountants and Lawyers </li></ul><ul><li>Subprime Issues Impacting Accountants and Lawyers </li></ul>
  29. 29. <ul><li>Auditors or professional advisors of any Madoff investor stand a good chance of becoming a defendant. </li></ul><ul><li>Auditors for the numerous feeder funds that invested all or a portion of their investors’ monies with Madoff </li></ul><ul><li>Are likely to face lawsuits from their fund clients and their clients’ investors </li></ul>WHO IS AT RISK?
  30. 30. <ul><li>Madoff’s auditor- </li></ul><ul><li>Friehling & Horowitz </li></ul><ul><ul><li>Three person operation: </li></ul></ul><ul><ul><ul><li>One active CPA </li></ul></ul></ul><ul><ul><ul><li>One secretary </li></ul></ul></ul><ul><ul><ul><li>Third person living in Florida </li></ul></ul></ul>WHO IS AT RISK?
  31. 31. WHO IS AT RISK? <ul><li>CPAs and lawyers that served as trustees, and personal representatives of estates and foundations that invested with Madoff </li></ul><ul><li>Any lawyer or CPA who accepted finders fees from Madoff, for soliciting new investors, will have difficulty convincing a jury that their objectivity in giving advice was not compromised </li></ul>
  32. 32. POTENTIAL PLAINTIFFS <ul><li>Entities that invested directly with Madoff will seek to recoup their losses (educational and charitable organizations and pension plans) </li></ul>
  33. 33. POTENTIAL PLAINTIFFS <ul><li>Individual investors will likely take aim at their accountants who offered investment advice (even if- or especially if- not retained to do so), alleging failure to adequately investigate the Madoff investments </li></ul>
  34. 34. WARNING SIGNS <ul><li>Recent lawsuits allege that feeder fund auditors failed to notice red flags: </li></ul><ul><ul><li>Madoff’s investment strategy was incapable of delivering the returns he reported </li></ul></ul><ul><ul><li>Option contracts in which Madoff was supposedly invested were not reflected in the trading of the option exchanges </li></ul></ul><ul><ul><li>Investors had no electronic access to their accounts at Madoff </li></ul></ul>
  35. 35. <ul><ul><li>Madoff did not have an independent custodian hold its investment securities </li></ul></ul><ul><ul><li>Madoff operated under a veil of secrecy and did not allow outside audits by significant investors </li></ul></ul><ul><ul><li>Madoff went to 100% cash every December 31, irrespective of market conditions </li></ul></ul>WARNING SIGNS (cont’d)
  36. 36. HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK <ul><ul><li>Miami Circuit Court – </li></ul></ul><ul><ul><li>Filed April 6, 2009 </li></ul></ul><ul><li>Headway sues: </li></ul><ul><ul><li>American Express Bank </li></ul></ul><ul><ul><li>Fairfield Greenwich </li></ul></ul><ul><ul><li>PriceWaterhouse Coopers </li></ul></ul><ul><ul><li>Citco </li></ul></ul>
  37. 37. HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK <ul><li>American Express recommended two Madoff funds </li></ul><ul><li>$10 million invested </li></ul><ul><li>Funds managed by Fairfield Greenwich – not disclosed to Headway </li></ul>
  38. 38. <ul><li>The lawsuit includes allegations of: </li></ul><ul><ul><li>Negligence </li></ul></ul><ul><ul><li>Breach of fiduciary duty </li></ul></ul><ul><ul><li>Unjust enrichment </li></ul></ul><ul><li>PriceWaterhouse Coopers audited the feeder funds </li></ul>HEADWAY INVESTMENT CORP V. AMERICAN EXPRESS BANK
  39. 39. GOLDBERG V. NATIONAL CPA FIRM <ul><li>Filed in Miami Circuit Court on March 30, 2009 </li></ul><ul><li>Plaintiffs lost approximately $100 million in Madoff investments </li></ul><ul><li>Plaintiffs sue trustees, personal representatives and investment advisors </li></ul>
  40. 40. GOLDBERG V. NATIONAL CPA FIRM <ul><li>Plaintiff allegations include: </li></ul><ul><ul><li>Demand for an Accounting of all funds held by the respective trusts </li></ul></ul><ul><ul><li>Breach of fiduciary duty against the trustees </li></ul></ul><ul><ul><li>Removal of trustees/personal representatives </li></ul></ul>
  41. 41. NEW CENTURY FINANCIAL CORP V. KPMG INTERNATIONAL AND LLP <ul><li>Filed April 1, 2009 – among the first attempts to blame auditors for the sub-prime mortgage crisis </li></ul><ul><li>Suit demands $ 1Billion in compensatory and consequential damages </li></ul>
  42. 42. NEW CENTURY FINANCIAL CORP V. KPMG INTERNATIONAL AND LLP <ul><li>KPMG performed financial statement audits of New Century </li></ul><ul><li>Complaint alleges that KPMG was grossly negligent in performing the audits </li></ul><ul><li>KPMG is “public watchdog” </li></ul>
  43. 43. Questions? <ul><li>Please let us know who should address your question. </li></ul>
  44. 44. Thanks! <ul><li>We appreciate your attendance! </li></ul>

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