• Save
Impact of the Economic Crisis on Traditional Professionals
Upcoming SlideShare
Loading in...5
×
 

Like this? Share it with your network

Share

Impact of the Economic Crisis on Traditional Professionals

on

  • 1,731 views

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

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

Statistics

Views

Total Views
1,731
Views on SlideShare
1,729
Embed Views
2

Actions

Likes
0
Downloads
0
Comments
1

2 Embeds 2

http://www.plusblog.org 1
http://ams.activemailservice.com 1

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
  • This website can be a useful resource to find out what started the financial crisis http://www.financialcrisis2009.org
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Impact of the Economic Crisis on Traditional Professionals Presentation Transcript

  • 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!