Risk Management
Get an inside look into some of the risk management issues the firm faces. Listen to a conversation with Denny Schleper, CEO, Hod Dahl, chief quality officer, and two representatives from Integro, our insurance brokerage agency.
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Transcript
Get an inside look into some of the risk management issues the firm faces. Listen to a conversation with Denny Schleper, CEO, Hod Dahl, chief quality officer, and two representatives from Integro, our insurance brokerage agency.
[00:00:05]
male announcer: Welcome to “Own the Promise,” a CLA podcast created to share what guides every decision we make and every relationship we cultivate.
[00:00:19]
Denny: Hello, everyone, CLA family, this is Denny Schleper. I wanted to take an opportunity that we’re just experiencing this week working with really our brokers, basically an agency out of Chicago, called “Integro” that works with CLA to help us place our insurance with underwriters both domestically as well as internationally for the firm.
[00:00:48]
It’s a great opportunity, obviously, to get exposure to what’s happening within the insurance marketplace, but what’s more importantly is it’s our opportunity to really share with the brokers, with the underwriters, where is CLA headed both strategically, economically, and so forth, but then ultimately it comes down to what type of experience is CLA having from an overall claims experience.
[00:01:19]
Where are we having quality issues within the firm that either potentially could turn to a claim or already has turned to a claim, and I thought for all of you it would be a great opportunity just to hear from some of the people that are with me. Of course, our chief quality officer, Hod Dahl, sits in on all of these meetings as I do, and we also have both John and Jay representing Integro here with us today as well.
[00:01:49]
They’ve been serving the firm in this capacity for many, many years. They know CLA extremely well. They know our experience and obviously are involved with all current issues, and I thought it’d be wonderful for all of you just to hear from them as to their perspective of CLA.
[00:02:06]
They have an opportunity to work with many other CPA firms, and I’m sure they see differences within CLA compared to some of their other clients and what we’re experiencing not only strategically and economically, but really also from our quality issues themselves, so I would like to ask them some questions, but before I do that, I’d like to just–Hod, if you just have some maybe introductory comments for the firm just to give them a perspective of really this process and what we go through not only to protect the firm, but improve the firm in the process as well.
[00:02:48]
Hod: Thanks, Denny, for that. This is a very interesting process to go through. I feel privileged over the last number of years to be able to represent CLA in these discussions with both our insurance brokers and then ultimately with the underwriters that support our professional liability insurance program. I think one of the intriguing things that has come out of these meetings is to hear the perspectives of the underwriters and the kinds of questions that they ask of Denny and I when we’re describing what’s happening in the firm both strategically and from a risk management perspective.
[00:03:28]
They’re very interested, obviously, in the claims experience we’ve had, but they’re also interested in finding out what are we doing to change the way we operate day in and day out that will improve the quality of the firm and by extension reduce our exposure to claims made against the firm, so I just really enjoy the interactions with the underwriters. They ask some tough questions once in a while, and it really challenges us to think about how are we responding to these risk issues.
[00:04:02]
Denny: Thank you, Hod. I’m gonna have both Jay and John introduce themselves, but also just maybe the perspective from your world that you come from. Just on a broad scale, what is the service that you provide, how you view the service that you provide to CLA, just to give everybody within CLA that perspective of the service that you provide to us?
[00:04:25]
Jay: Thanks, Denny. Yes, this is Jay, and I’m with Integro. The service we provide to our clients and to CLA is in part insurance brokerage services where it’s our job to go out to the marketplace and find the underwriters that match a firm like CLA. For example, just here today we had 12 underwriters that we talked to as part of the process, and then we will also be going in to the London marketplace where we’ll be talking for with another nine to ten markets on that as well, so we match you up with the brokers–
[00:04:59]
As the brokers, we match the firm up with the underwriters, but part of the process as we do that is a firm such as CLA is a size such that you get individually underwritten. Small firms, it’s just a mechanical application of rates to revenues and certain characteristics, but underwriters really look at firms like CLA as individuals, and the individual characteristics that you exude when you have the meetings with them go a long way towards how they look at you, how they rate you, whether they want to participate in your program or not, and then part of our job is also to consult with Denny and Hod in explaining what those underwriting appetites are and also to consult with you on ways that perhaps we can see to make you a better risk in the eyes of the underwriters.
[00:05:49]
John: Yeah, I would go with those comments. This is John Hecht with Integro. I work with Jay. I think also another part of our job is to sort of look in to our crystal ball and try to consult with CLA on where we think the market is going. You know, one of the discussions we’ve been having as of late is given this substantial growth in revenues that CLA’s experienced over the last number of years, what type of changes in the CLA’s insurance program does that result in?
[00:06:20]
Things like both from a pricing perspective as well as from a self-insured retention perspective, how much risk–How much additional risk is CLA gonna be required to take on given their revenue growth? So those are the sort of future sort of consultations that we have with CLA to prepare them for changes in the insurance program going forward.
[00:06:44]
Denny: Thank you, John and Jay. You know, CLA family, I got to tell you I’ve been having these meetings for the last three years or so, and be it here domestically or over in London, they’re always, I would say, quite tense meetings from my perspective, and I think Hod would share this. While it’s great to share the wonderful things that CLA does, clearly the discussion heads towards, “Where have we, as a CLA professional service firm, fallen down? Where have we maybe not provided the service to the client that could have been provided? Where did we not have the skepticism that we should be having as a professional service provider within our client base?”
[00:07:32]
Clearly what we’re dealing with as we go through the claims within in CLA, we’re dealing with a tremendous amount of fraud issues within our client base, and while that may or may not be unusual–I’d like Jay and John to address some of that, but ultimately it doesn’t take away the fact that we are experiencing it within CLA, and it’s some thing that we have to definitely, as all of our people serve our clients, turn up the skepticism, understand that there is fraud in every single client.
[00:08:07]
We’ve heard Hod express this. We’ve heard Peter express this. It’s not that it’s sitting in someone else’s client. It’s sitting in your client. The issue is, “Are we properly planning our engagement to address those fraud issues? Are we properly communicating with governance related where we think those risk areas are?” And clearly what’s been happening over the last 24 months or so is more fraud issues popping up where I’m not sure as a CLA professional service firm we’ve done every thing we possibly could to help serve that client appropriately, and I’m not talking from a legal perspective.
[00:08:48]
I’m talking just purely from a client service perspective, so John or Jay, maybe give us a perspective as to how you see CLA. You’ve been dealing with us for so many years. You’ve seen different issues pop up. You’ve seen trends. Any observations, and it can, again, range from the good to the ugly category. We would like to hear from you as to how do you view CLA? You’re obviously, I would say, supporting CLA as you described when you’re going to the underwriters, so in a sense you’re on our side. On the same point though, you know our firm extremely well. Thoughts in that regards?
[00:09:35]
Jay: Well, Denny, I think–One thing I think of when I think of CLA which is both a strength and a weakness is we’ve always been impressed with the culture of getting close and really getting to know your clients and becoming trusted advisors of your clients, and that is clearly a strength in the business side of things, and you know, underwriters from a risk point of view, they view that firms that are well run from a business and well run in terms of getting to know their clients are better risks, but the negative side of that is if you get so close to your client that you’re not aware of the fraud potential, as you say, in any one client.
[00:10:17]
You know, the hope is that the vast majority of your clients will never have a fraud. You are dealing with honest people. The problem is you never know where the fraud might come up. It could be someone that you trust, and as you get close to your clients, as you do because that’s part of your business strategy, you tend to have a more trusting relationship with them, but in your profession, as close as you get, you always have to have that skepticism in the back of your mind when you’re doing the engagement itself, particularly any kind of assurance work, but even in the tax arena we see frauds can get firms in to trouble, so one of your biggest strengths, getting close to your clients, can be a handicap if you don’t really keep that skepticism in mind.
[00:11:00]
John: Yeah, I think Jay said it well on fraud. I mean, if you look at the significant claims not only that CLA has had, but as well as the industry as a whole has had maybe since the financial crisis, they’re all really fraud related claims, and so it just highlights the importance of having the fraud issue, I think, at the top of your mind. But I think the other, you know, the other thing that underwriters are concerned about, especially with respect to CLA, is the large number of transactions that have been done over the years and the challenge that all firms face in making sure that those acquired firms come on board to CLA’s culture of consultation.
[00:11:44]
I think that’s really important that those firms are reminded all the time that CLA is a consultation culture firm, and that that consultation really helps reduce risk, get the right people involved early on, and I think if CLA’s successful in sort of converting that culture in to these acquired firms going forward, I think that’s gonna do a lot to reducing the overall risk of the firm.
[00:12:11]
Denny: And Hod, maybe a comment. When you look at all of our claim experiences or any thing that needs to be reported, someone could argue that, you know, regulations, especially in the assurance world, kind of push us somewhat away from maybe using good sound business judgment as it comes to fraud issues and so forth, and we’re so concentrated on fulfilling the regulatory requirements of, let’s say an audit engagement or any type of assurance engagement.
[00:12:42]
My sense is is that the good news with CLA is that for a large degree, not that we don’t have any mishaps here, but to a large degree we’re meeting those regulatory requirements, and it really does come down to the majority of the issues are in this fraud arena. I’d like you to comment on that, but where you think we also may be falling down on regulatory related requirements, share that as well.
[00:13:12]
Hod: Thank you, Denny. I do think that on the lion’s share of the assurance work that we’re doing as a firm, it’s clearly meeting the regulatory requirements. We’re seeing that in our inspection activity and the results of our inspection activity. I do think we play best when we play to our strengths, and one of the firm’s clear strengths is to use our industry expertise to serve our clients. Where we some times fall down is when we have individuals that are involved with a client and they really don’t understand or can’t articulate, “How does that client make money?”
[00:13:51]
If our professionals understand the business model and what our clients are up to and the vulnerabilities in their business model, it’s much easier for us to help them achieve their objectives, but it’s also much easier for us to practice in a risk-aware way and leverage that knowledge of the client in to effective audit procedures that address audit failures as it relates to the financial statements, but also addresses the theft vulnerability that many of our clients have because of a lack of internal controls or over reliance on a key individual who’s a long-term trusted person who everybody is convinced would never steal any money, and yet when I get the phone call, they usually start with, “Hod, you won’t believe what just happened,” and I already believe what just happened ’cause I’ve seen it before. It’s that trusted internal resource who has figured out a way to take some money from the company, and they’re gonna take advantage of it.
[00:14:53]
Denny: Hod, I’ve heard you many times, and I’d like you–I’ll put you on the spot. I’d like you to again reiterate kind of how you’ve developed, I think it’s three different areas to help people assess risk from an engagement standpoint, and what’s really critical to help us always keep in mind as we not only serve our clients, but manage risk as well?
[00:15:16]
Hod: Well, Denny, I start usually by a discussion about our environment. Number one, we’re a very large firm. This year I think we’ll end up with $870 million. It won’t be long before a billion-dollar firm. Because we’re a large firm, our clients expect we’re gonna deliver at a very high-quality level, so that’s an awareness level, number one.
[00:15:38]
Awareness level number two is our clients tend to have less robust internal control systems, so as a result they are subjected to more fraud than many of our [peer] firms. Number three, we are in a unrelenting regulatory environment. If we make mistakes, the regulators are gonna look to capitalize on that mistake and make an example of us.
[00:16:05]
Denny: That’s very helpful actually because I think, again, all of it just around the awareness in the marketplace itself. Turning back to John and Jay just for a second, is there any overall recommendations that you see that maybe you observe other firms doing that you’re saying, “You know, in a CLA environment, we don’t necessarily hear that or see that,” and could be a good idea for CLA to examine and explore, and if there really isn’t any thing that you observed specifically from that, maybe just conclude by, “What is the one overreaching recommendation you would give?” If you had the opportunity to be in front of 5,000 of the CLA employees, what would be the message that you would send?
[00:16:57]
John: I think the message I would send would be “Be careful who you do business with.” You know, it’s about doing good work for good clients, not good work for any client. The wrong kind of client is what’s gonna get you in trouble, and you all have to act as the first line of defense by only trying to bring in clients that you have vetted as carefully as you can. You can’t get every bad actor, but make sure you’re doing your work for people that deserve your work.
[00:17:30]
Jay: You know, I hate to be a broken record, but I think the idea of consulting with the right people internally whenever you have a bad feeling. I think people who try to go it alone and sort of sweep things under the rug because they think something’s gonna go away or they maybe just don’t follow their gut, you’re never gonna have a problem if you pick up the phone and you make that call and you talk to someone else internally about it.
[00:17:55]
If it’s a non issue, that’s fine. If it’s an issue, now you’ve raised it. You’ve got the right people involved. You have a big firm, a lot of resources behind you, and I think, you know, it’s important to recognize that and to make use of those resources internally.
[00:18:10]
Denny: Well, John and Jay, thank you so much for kind of sending some of those messages. I just want to, again, let the CLA family perspective. We have about, all in, $85 million of coverage within the firm which Integro is able to help us securing on an annual basis. The premiums related to that, I’ve just given you a round number of $7 million related to the premiums to pay for this. This is not a small issue.
[00:18:38]
This is not a small matter for the firm, and what I continuously say is, “What is the one thing that can prevent CLA from reaching the promise and being successful?” And as I pause, I hope all of you are repeating to yourself, “It’s our quality.” Quality work is the only thing. The lack of quality work is the only thing that can prevent us from reaching our goals. We’ll get our growth. It may not be as much as we want some years. It may be more other years, but the quality issue has to be a consistent effort within the firm, so again, Integro, thank you for the relationship and all the help that you provide CLA in not only keeping us safe, but protecting us when issues do come up. And Hod, thank you for your participation and always the invite to these.
[00:19:32]
Hod: Thank you.
[00:19:34]
Have a great day.
Denny is the chief executive officer of CLA. As he goes about his duties related to the oversight of CLA’s direction, operations, expansion, and strategy, he is also an enthusiastic ambassador for the CLA Promise. He is fully committed to the firm’s position as a professional services firm that delivers integrated wealth advisory, outsourcing, and audit, tax, and consulting capabilities to help our clients succeed professionally and personally.
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