Home > California CPA Magazine > December 2008 Issue > CAMICO: Changing of the Insurance Guard

CAMICO: Changing of the Insurance Guard

California CPA magazine: December 2008

Ric Rosario, CPA, CFE is preparing to take the reins as CEO of CAMICO, the nation’s largest CPA-owned provider of professional liability insurance for CPAs. He will take over for John A. Dodsworth, CPA, who, in a planned move, will retire June 30, 2009, after having served as CAMICO’s chief executive since the company’s inception in 1986. California CPA recently sat down with both leaders to talk about the past, present and future of the company and its industry.
As CAMICO approaches its 25th anniversary, how’s business?
Dodsworth: Our policy sales and renewals have been good. However, these are challenging times for insurance companies as the industry has been rocked and the entire financial sector severely impacted by recent economic events and losses. CAMICO is impacted to a somewhat lesser degree because of our focus on CPA firms and our mission of providing a stable source of insurance and risk management services to CPAs.
Rosario: These are also dynamic times. Business has generally been good for CPA firms, and CAMICO has benefited from that positive trend. The insurance market has been soft, though, with a lot of insurance companies that don’t have experience with accountants liability, the downside of which is a lot of competition from new and inexperienced players in the market. With the recent downturn in the economy, however, the question is, how much will the market change? Will the soft market become a hard market? CAMICO tries to avoid huge swings between soft and hard markets as we strive to provide stability to our policyholders.
What is the most challenging aspect at CAMICO?
Dodsworth: We have a very diverse policyholder base ranging from sole practitioners to firms with more than 500 professionals. Firms do everything from write-up work and tax returns, to public company audits and very sophisticated consulting work. The most challenging aspect of that for me is helping all of those types of firms meet their risk management needs.
Rosario: As CAMICO has grown over the years, it has also become more challenging to get in front of CPAs and get them to see that CAMICO has a unique value proposition in the insurance world—what we call “the CAMICO experience.” Getting that message across to larger groups of CPAs is the most challenging aspect for me.
What is the most rewarding?
Dodsworth: Spending time with our policyholders, whether in loss prevention seminars or just visiting with owners regarding what’s going on in their practices and what CAMICO can do to help. That makes me—and the company—feel a part of the CPA profession instead of just the insurance business.
Rosario: When someone blames the CPA in an unwarranted or fabricated manner, we deliver our liability expertise, experience, knowledge and resources. We bring all of that to bear in getting the CPA out of the problem. And when we solve the problem, we have a customer forever, because no one does it better than CAMICO.
What are the most common claims CAMICO deals with? How can one avoid having such claims brought against them?
Rosario: Claims stemming from tax return preparation are the most common, representing over half of our claims. They tend to be smaller claims than, say, audit claims, but their frequency is high, which drives up the total dollar amounts spent in this area.
Usually, having better work-flow or management systems in place will prevent many of these claims. Simply tracking items such as estate tax due dates so that there are no late filings or payments is a big step. Good systems, combined with competent staff, also will help ensure that there are fewer errors, uncompleted tasks, and poor thinking and decision-making. It’s also important to recognize when you need special expertise instead of attempting to do work for which you are not up to speed. Keeping up with professional education and tax law developments is crucial.
Do claims follow any kind of trends?
Dodsworth: They do in that we’ve seen the same types of claims being repeated over the years. Three main types are: 1) tax work (which we just mentioned); 2) defalcation and fraud; and 3) financial statement work as it relates to third parties, such as banks.
Tax claims tend to go up when the economy takes a downturn or there are changes in tax law. Defalcation and fraud claims tend to occur in good times and bad, except that investment fraud tends to be susceptible to the economy and can affect audits, reviews and valuations. Financial statement work also is susceptible to the economy when third-party creditors are involved, and now that area faces increasing risk because of our economy.
Is doing business in California more challenging than in other states, from a claims /risk perspective?
Rosario: It is in that the underlying dollar values in transactions tend to be larger, which tends to produce larger losses, larger claims and larger premiums. California also has some entertainment industry niches that other states don’t. But, generally, there are more similarities among all of the states than there are differences.
What is the most important thing CPAs don’t know about claims that might be brought against them?
Dodsworth: Jurors’ expectations of CPAs often create a higher standard of care than the standards set by the profession. Some of these are: 1) Always detect fraud, 2) Advise clients of opportunities and warn them of the risks, and 3) “Get it right,” which always looks more obvious in hindsight, especially when a skilled plaintiff’s attorney is able to lay out the facts well after the error was made. Many CPAs also do not realize that they can be sued by third parties, so it’s always important to keep in mind the risk exposures from parties relying on work done for clients.
What type of claims against CPAs might crop up during the current financial crisis and how might they be avoided?
Rosario: The credit crunch will cause difficulties and business problems for many clients, some of whom might blame their CPA for not having warned them that they were heading into trouble. Some might pressure the CPA to prepare their financial statements a certain way so they can qualify for credit. Third-party creditors and investors might blame the CPA for losses they’ve sustained on loans and investments. It’s important for the CPA to be aware of the problems and the clients who are likely to have problems. The CPA can then help clients and provide them with good advice on avoiding certain pitfalls. It’s also important to increase professional skepticism, as some desperate clients may take desperate measures that might get by a CPA who has become complacent. Skepticism means questioning transactions and explanations that don’t make sense. Client screening for new and existing clients is always important.
What should CPAs keep in mind when deciding to take on a client, as far as protecting themselves from litigious actions?
Dodsworth: The three main questions in the client-screening process are: 1) Is the engagement a good fit for the firm’s expertise? This should lead to a discussion of whether the firm is professionally staffed, qualified and competent to take on or continue with an engagement;
2) Is the client the kind of client the firm would like to have? Questions about the client’s reputation, integrity and expectations come into play here, as do potential or actual conflicts of interest, and impairment of independence and objectivity; and 3) Is the client financially viable? The answer to this question will help in avoiding fee collection problems and disputes. CPAs should interview the prior CPA and other key personnel, run a credit check, and examine the past three years of financial statements, tax returns and prior CPA management letters. We recommend background checks for all significant engagements.
Blowing the whistle on a client’s illegal activity is not an ideal situation for a CPA, but might be required. What guidelines should CPAs follow?
Rosario: This situation can occur when the CPA detects or is about to detect fraud or malfeasance and is fired by the client. Due to concerns such as client confidentiality, the CPA sometimes refrains from reporting the suspected fraud, but by doing so the CPA can end up on the wrong side. It’s always better to stay on the other side—“the side of the angels”—even if it means going beyond professional standards. When a CPA is fired under suspicious circumstances, he or she also can make a “noisy departure” to warn the interested parties that something may be amiss. These situations always should be referred to an attorney. We urge CAMICO policyholders to call us if they run into the situation.
What liability issues come into play for CPAs when it comes to technology, and how can they be avoided?
Dodsworth: The biggest problem that we’re hearing about is missing laptops, the loss of which causes plenty of trouble in terms of lost user productivity, billable hours and business opportunities. But if unencrypted confidential client data is lost in addition to the computer, then you have the expense of notifying those clients as well as more business lost from clients unwilling to continue with an organization that has failed to protect their confidential information. CAMICO has a comprehensive information security checklist that CPA firms can use to keep client data safe. We are developing a new ID Theft/Cyber Security Resource Center on our members-only site that will provide resources, tools and even discounts to policyholders that subscribe to certain security services.
How will global movements, like international reporting financial standards and the consideration of an “international” CPA license, affect CAMICO’s business?
Rosario: Nobody can tell how and when such global movements will affect CAMICO’s business, but the changes are likely to cause
some mistakes and problems as people work their way along the learning curve.
Do you encounter any CPA mobility claims worth mentioning? Will the occurrence of such claims change if California passes the mobility requirements under deliberation?
Dodsworth: CAMICO hasn’t had any claims directly related to mobility. We did have a claim where the lack of registration in a state posed a problem with our “mock juries.” Lack of conformity with other states will cause problems for California CPAs.
How has the profession changed since CAMICO opened its doors June 24, 1986?
Dodsworth: There have been many changes, but the significant ones that come to mind are: 1) an improvement in the understanding of the importance of the CPA’s role in society, both outside of the profession and within it; 2) a proliferation of rules and an explosion of the standards we operate under; 3) an expansion of services, especially in financial services and valuation work; and 4) advances in technology that enable CPAs to deliver services to clients.
How has CAMICO changed?
Dodsworth: CAMICO has grown from operating just in California to operating in 45 states and the District of Columbia, and we’ve grown from serving about 1,400 policyholder firms to about 7,400 firms. We’ve added a Loss Prevention department and expanded other services over the years. Our sales function has also grown from nothing in 1986 to a direct sales department of six people and a network of more than 50 insurance agencies across the country.
To old-timers at CalCPA, CAMICO’s uniqueness springs from the simple fact that CalCPA members started the company. What do you think differentiates CAMICO from its competitors?
Dodsworth: The fact that CAMICO started under the umbrella of CalCPA has been a defining element of the company. CalCPA supported the development of CAMICO until the company was able to return some of that support to the society. Now we are sponsored by 15 state societies, and we have been and will continue to support those societies and their members. The mutual aspect of CAMICO is also important in that the company was founded and is owned by its CPA policyholders. Our board members are members of the CPA profession, and the company has been and will continue to be headed by a CPA.
What do you think your greatest achievement has been at CAMICO?
Dodsworth: When the company first started, we promised our initial policyholders that if they would loan us the capital needed to start the company (more than $10 million), we would do our best to pay them back. I made most of those presentations to the initial policyholders, so the proudest moment for me was when we paid back all of their contributions. Another fact is that CalCPA is the only state society to have attempted and succeeded in establishing a mutual insurance company, so that’s something we all can be proud of.
What do you hope to bring to the leadership position at CAMICO?
Rosario: The company has been successful and is in a great position. I see my job as continuing, sustaining and building on the success that has been achieved by our management, staff and others. CAMICO is no longer a little company in California; it’s a national carrier that requires the talents and skills of a large group of people—not just our staff, but also our defense attorneys, reinsurers and agents across the country.
I also would like to strengthen CAMICO’s ability to serve the CPA profession for the long run. We’re the premier carrier in this country for CPAs, in soft and hard markets, and I’d like to continue to build on our financial strength and stability while providing superior policyholder service in underwriting, loss prevention and claims.
Looking ahead, how will CAMICO evolve to keep up with the fast-changing CPA profession?
Rosario: Our loss prevention and risk management services are innovative and attentive to the evolving needs of the CPA profession, as CAMICO’s CPA-centric approach keeps us in touch with changes in the profession. We will continue to work with state CPA societies and CPA firm associations to stay abreast of all of the shifts in the profession. We also gather a lot of information about what’s going on through our hotline advisory services, because that’s how we hear from practicing CPAs who are running into problems from a variety of sources.
How do you hope to be remembered after you leave?
Dodsworth: I don’t plan on disappearing entirely, as I will remain active in the profession and serve on the CAMICO board of directors. I would like to be remembered as someone who wanted to do the right thing and who helped start a company that will endure for a long time and is regarded as a supporter and defender of the profession. I didn’t do all of this myself, of course. I just happened to be the guy at the helm of the ship. CalCPA always has provided its support, and we’ve always had a great board of CPAs and a great staff of people we have managed to attract to the company. But in 1986, CalCPA agreed to go at risk for the organizing and start-up costs, which represented almost 20 percent of the society’s dues revenue for one year—a huge risk. But the people involved, such as Jim Kurtz and Lou Barbich, the CalCPA executive director and chair at the time, made a courageous commitment to something for which there was no guarantee—just people with a passion to make the company successful.
What single piece of advice would you give CPAs on how best to protect themselves and their practices?
Dodsworth: When you’ve already researched the rules about an issue and you come to a fork in the road about how to handle it, ask yourself, “What’s the right thing to do for the public and the client?” Too many CPAs get into trouble by just following the rules, and that doesn’t always produce the right result.