The sharp rise in the number of insolvencies in the UK is having little impact on the current soft market for accountants’ and auditors’ professional indemnity (PI) insurance, according to Marsh, the world’s leading insurance broker and risk adviser.

There were 4,941 compulsory liquidations and creditors’ voluntary liquidations in England and Wales in the first quarter of 2009 according to The Insolvency Service. This is an increase of 7.1% over the previous quarter and an increase of 56% on the same period a year ago.

Troy Russell, a Senior Vice President in Marsh’s Financial and Professional Practice, said: “For accountants, insolvencies can be a ‘red flag’ for potential litigation, as a number of parties, for example, clients, creditors or liquidators seek to recoup losses they believe have arisen from poor or inappropriate accountancy advice. If an accounting firm is making more claims on its insurance, it will inevitably be faced with higher insurance costs at renewal.

“Counterbalancing that, new capacity entering the PI insurance market has meant that there has not been rising insurance costs across the market. In some cases there have even been premium reductions at renewal. This bucks the trend of other professions and financial institutions, where conditions are more challenging.

“When there are claims, we have found that insurers are wanting to settle more swiftly in order to limit their litigation costs. This sits comfortably with claimants favouring quick cash settlements. The trend is for quicker settlements, for less.”

As forecasted by Marsh last year, fraud risk for auditors and accountants has become more prominent in 2009. On 30 July, the House of Lords rejected the claim by the liquidators of a company against its former auditor for failure to detect fraud (Stone & Rolls v Moore Stephens Ltd).

Commenting on the decision, Mr Russell said: “The decision by the House of Lords will no doubt be greeted positively by accountants and auditors. Nevertheless, firms should be mindful that as the audited company was controlled by a single person, the outcome of the case is unlikely to change an auditor’s duties.

“In the current environment, with discovery of fraud increasing, accountants and auditors will need to demonstrate more than ever that sufficient care has been taken to discover any anomalies in accounts.

“Good risk management practice is key to accountants and auditors maintaining the current level of competitive premiums that they currently enjoy. Honest and open communication with clients, as well as full transparency, is vital. Terms of engagement letters should be kept up to date to ensure that there is no ambiguity or room for manoeuvre in the event of a claim.”