Impact of the Economic Crisis on Traditional Professionals

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

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

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