1. 1 Risks Faced in Accountants Professional Liability Accounting Firms from a Risk Control Perspective April 18, 2007 Joseph Wolfe Assistant Vice President, Risk Control CNA Pro Commercial PROPERTY & CASUALTY LIFE & ANNUITIES GROUP BENEFITS REINSURANCE

2. 2 The purpose of this presentation is to provide information, rather than advice or opinion. It is accurate to the best of the speakers' knowledge as of the date of the presentation. Accordingly, this presentation should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to non-CNA websites are provided solely for convenience, and CNA disclaims any responsibility with respect to such websites. To the extent this presentation contains any descriptions of CNA products, please note that all products may not be available in all states. Actual terms, coverages, amounts, conditions and exclusions are governed and controlled by the terms and conditions of the relevant insurance policies. In addition, the examples discussed in this presentation are hypothetical and fictitious. Any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program CNA is a service mark registered with the United States Patent and Trademark Office. Copyright © 2007 CNA. All rights reserved.

3. 3 Traditional CPA Firm vs. Consolidator Model Traditional CPA Firm –Tax and Accounting Services –Audit and Attest –Consulting Independence rules (ET Section 101, Code of Professional Conduct) –Restricts relationships with and services to audit/attest clients –Restricts direct/indirect ownership interests in related entities –Special rules for alternative practice structures Consolidator Model –Business Services Firm Renders tax, accounting, consulting services –CPA Firm Renders audit and attest services –Shared ownership and shared staff

4. 4 Consolidator Model Aggressive growth to improve cross-sell opportunities and leverage resources Multiple offices, centralization of management/administration functions varies Absent strong management, oversight and quality control may suffer CPAs obligated to comply with AICPA Code of Professional Conduct regardless of “hat” they wear How are revenues tracked and reported? Claims asserted vs. both business services and CPA firm – multiple limits exposed

5. 5 Mergers/Acquisitions Aggressive consolidation by regional CPA firms –Leveraging resources and branding –Developing geographic or industry specialization “footprint” –Rapid acquisition activity can heighten risk –Conflicts between “home office” and PIC of acquired firm –What’s the right mix of autonomy and independence? –Does firm has resources to effectively manage mergers/acquisitions? –Merger, acquisition, or asset purchase? What’s the plan if it doesn’t work?

6. 6 Firm Size Differentiation Solo or small firm –Performs primarily tax and bookkeeping services –May be part time practice –Size of client and level of service restricted by resources Local firm –Client base usually localized –May be CPAs practicing as one firm but operating independently –Management and quality control resources limited

7. 7 Firm Size Differentiation Large local firm –May have several offices; some may be storefronts only –Better resources but larger clients/exposures –How are branch offices managed? –Succession plan, plan to grow or be acquired, or no plan at all? Small regional firm –Need for principals to transition from client services to full time firm management –Strong centralized control essential to manage client acceptance/continuance and quality control –May attract former principals of national CPA firms; change in exposure –May target clients of super regional and national CPA firms –Written application provides only the “tip of the iceberg”

8. 8 Firm Size Differentiation Super Regional firm –Established geographic presence in more than one state or section of U.S. –Exposure to international companies and publicly traded companies likely –Several hundred to several thousand employees –May compete directly with national CPA or consulting firms –Management styles and exposures vary widely –Complex risks: significant exposures, limits and premiums

9. 9 Keeping Up with the Profession: Professional Standards AICPA PCAOB –Public Company Accounting Oversight Board FASB –Financial Accounting Standards Board GAO –Government Accountability Office (sets U.S. Government Auditing Standards: “Yellow Book”) OMB –Office of Management and Budget (issues Circular No. A-133: standards for audits of state and local governments, not for profit organizations)

10. 10 Keeping Up with the Profession: Other Standards Setting Bodies COSO –The Committee of Sponsoring Organizations of the Treadway Commission Not a standards setting body, but a voluntary private sector organization whose guidance is considered authoritative Formed in 1985 to study factors leading to fraudulent financial reporting Focuses on internal control processes; COSO framework used by internal control consultants in performing SOX 404 services U.S. Treasury Department –Regulates practice before the IRS: issues Circular No. 230 IRS –Internal Revenue Code State Departments of Revenue –Regulate state income, sales, use taxes

11. 11 Keeping Up with the Profession: Licensing, Peer Review and Continuing Professional Education CPAs licensed by state boards of accountancy –Investigates ethics complaints (also AICPA Professional Ethics Division) –Cross border licensing issues problematic –Many CPAs practice in multiple states –Check licensing, disciplinary history via Internet

12. 12 Keeping Up with the Profession: Licensing, Peer Review and Continuing Professional Education Peer review – Mandated for all AICPA members –Administered by AICPA, state CPA societies & state boards of accountancy Report Review (compilations only) Engagement Review (compilations and reviews only) System Review (includes audit practice) CPCAF Peer Review (for member firms; public co. audits) PCAOB inspection –Required for all firms auditing public companies

13. 13 Keeping Up with the Profession: Licensing, Peer Review and Continuing Professional Education Continuing Professional Education –Generally 40 hours/yr. mandatory –Does firm track training? –Training related to practice specialization?

14. 14 Keeping Up with the Profession: Summary CPA Profession is: –Dynamic –Affected by marketplace competition from both within and outside –Subject to changes in economic conditions and regulatory/legal climate CPAs in public practice subject to complex professional standards, laws and regulations –Intimate knowledge not needed for underwriting purposes, but general knowledge is essential CPAs practice in culture of consultation and are generally responsive to risk management guidance

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