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Minimizing the risk of malpractice claims from lateral hires

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By Rickard Jorgensen, FCII, ARM, ACIArb

Many accounting firms have aggressive plans to build their practices and expand the range of services available to clients.   Growth strategy is often comprises of several elements:

  • Organic growth is the simplest and arises from marketing, business and employee development and cross selling services to clients.
  • Mergers and acquisition has been deal with in several past blog postings. The most comprehensive is here.
  • Hiring new “rain makers” and teams of staff from competitors or peer firms.

It is the third strategy that is the subject to this article.

Human asset acquisition can be the most challenging aspect of growing a practice.  Even before business development potential, such factors as chemistry, personality and cultural acceptance are key to a successful new hire.  Much of this aspect of the hiring process can be addressed during employee screening and, if you use it, psychological testing.  One often overlooked aspect of new partner or employee evaluation is past professional liability claims history.

In the past few years the biggest claim in theCPAGold™ arose from a new partner that “imported” exposure to the new employer firm.  In simplest terms, the new partner had been providing services to a high-risk client. The firm had not expanded the new employee due diligence to specifically include this client, and relied upon the new hire’s opinion that no client represented an increased risk of a professional liability claim to the hiring firm.  After a year or more of continuing services, the high risk client encountered financial difficulties and sued the partner, the predecessor firm and the new firm. Regardless of any apportionment of liability for the services rendered, the new firm incurred substantial defense costs.

A firm can never totally avoid the exposure to a claim arising from a lateral hire.  Seeking an indemnification from the incoming partner can mitigate risk (or the purchase of prior acts coverage) but one of the best defenses is knowledge.  Being aware of the new hires past record and clients’ business profiles may be the best way to stimulate further dialogue and develop an understanding of the risks presented by bringing a new partner or employee into your team.

To facilitate this CPAGold™ has developed a risk management tool called a “Lateral Hire Questionnaire”.  This is available here and is a template for the type of questions a firm’s HR department or hiring commitment may ask a candidate.  Of course, this list of questions is not be all encompassing and individual firm’s may wish to augment or ignore certain questions, but we hope this is a useful starting point to assist you in the employee/new partner screening process.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com

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