The ethics of audit self-insurance in Canadian accounting

TORONTO, December 27, 2019 – Although the concept of audit insurance to cover the cost of a client’s audit by the Canada Revenue Agency (CRA) is not new, the Canadian accounting profession has welcomed an overseas provider that, since 2015, has provided an insurance solution that continues to gain traction and favour across Canada.

In the past, accountants tended to compensate for potential CRA audits by: 1, Doing nothing and living with the angst; 2, Adding a charge to every bill to cover potential audit costs; or 3, Offering clients an option to pay a small amount up front that entitles them to audit-related services at no additional charge. Although the second and third options are self-insurance options representing a profit center opportunity, few accountants have considered this “cottage industry” from an ethics perspective. For most firms, however, self-insurance is a workflow hassle that just replaces the hassle of collecting payment if no insurance exists. So, no net gain.

In 2015, Accountancy Insurance entered the Canadian market and introduced Audit Shield, a structured, complete audit insurance offering that paid accountants for their time and effort, should a CRA audit of one’s client occur. It incorporates resources to assist in the client communication. Whereas self-insurance arrangements required accountants to get as many clients as possible to participate in the program — otherwise firms were exposed to risk of loss — accountants could now hold an insurance policy that aligned their interests with the interests of their client.

Ethically, self-insurance is a serious challenge to objectivity; whether real or perceived, the schemes may unduly influence professional judgment, given that accountants need the participation of many clients to fund the audits of a few. During an actual audit, accountants may be even more compromised, given they have already banked the client’s participation fee, and a CRA audit affects billing time which is not recoverable. The incentive to do the minimum required is real. It is a fundamental principle of the accounting profession that accountants provide professional services to their clients that are free of prejudice, conflict of interest or undue influence that may impair sound professional judgment.

How Audit Shield differs from self-insurance plans

How is Audit Shield different? While Audit Shield and self-insurance are essentially fee-waiver arrangements, the two differ ethically. Firstly, with Audit Shield, accountants are not incentivized to pursue clients, as compared with self-insurance plans. They may make a small gross profit on a client participating in Audit Shield, but a self-insurance plan has the potential for a large gross profit, as the fees collected are clear profit subject to any actual potential audit work.

Secondly, the need to have clients participating in Audit Shield is not significantly financially incentivized as, under this approach, the accountant is either going to be paid for any additional fees by the insurance product or by their client, comfortable in the knowledge that they were offered an alternative that they declined.

Under a self-insurance plan, accountants could charge non-participating clients on the same basis/rationale, but they need clients to participate in their program whether clients need it or not. (No accountant would create a self-insurance plan with the risk of loss, but would only with the anticipation of profit.) In fact, the more clients that participate in a self-insurance program, the better it is for the accountant — whether the client really needs it or not. With Audit Shield, it doesn’t matter much, nor do the ethical implications.

Removing the Conflict of Interest

Finally, in the event of a CRA audit, the difference between the two plans is significant. Whether real or perceived, the self-insurance option puts the client and their accountant at odds to each other — a direct conflict of interest. This occurs at a time of duress, when a client needs professional guidance, despite the financial incentive for the accountant to do only the minimum required. That is, the more audit work performed under self-insurance means less profit for the accountant. This is counter-intuitive to the normal accountant business model of more time generally means more fees. More fees generally means more profit.

Under the profession’s Code of Ethics, accountants are required to remain objective and not compromise their professional or business judgment due to bias, conflict of interest or undue influence. Being the trusted advisor and the service provider in a time of need, arguably, this conflict cannot be managed merely by way of a disclosure to the clients or written consent being obtained, but should be removed completely by not offering self-insurance.

With Audit Shield from Accountancy Insurance, there is no significant benefit in pursuing the participation of more clients, nor is there a conflict between the interests of the accountant and those of the client. With Audit Shield, there is no hassle and no ethical conflict. Which option would you choose?

Find out more about Audit Shield from Accountancy Insurance. This Partner Post was written by Canadian Accountant editorial staff.