As CPA firms across the country continue to experience ongoing growth, they are also facing increased risk and complexity due to shifting business models and service offerings. And yet, many CPAs and accountants forego professional liability coverage in an effort to manage expenses. This may be short-sighted, as the cost of a malpractice claim can be financially devastating to a CPA firm. Here, we’ll explore why many accounting firms and individual practitioners prefer to “go bare” and eschew professional liability coverage, what liability they may face, and how securing the appropriate insurance coverage can help them stay protected.
What is “going bare,” and why do some accounting firms choose to do so?
“Going bare” in accounting means abstaining from carrying professional liability insurance and, instead, relying on your own finances to cover you in the case of a claim arising from its professional services. There are many reasons CPAs believe they don’t need professional liability coverage, including these myths:
- Small firm clients don’t sue, so professional liability insurance isn’t needed. TRUTH: Smaller firms may be sued as well as any other size firm, but the financial impact could be even greater for a smaller firm.
- They’re more likely to be sued if they’re insured. TRUTH: When faced with losses, anyone could sue you and your firm. It isn’t dependent on whether or not you’re insured, but the financial impact may be drastically different if legal expenses and settlement costs are self-funded.
- They’re managing their risks. TRUTH: Mitigating risks doesn’t mean avoiding them altogether. Sometimes the unexpected happens.
Can an accountant be held responsible?
Yes, an accountant or CPA can be held responsible for losses related to their services. If a client believes they incurred losses because of their accountant’s lapse in their professional duties or has failed to provide appropriate advice, the client can bring a demand or lawsuit against the accountant. Accounting firms, therefore, must stay vigilant when it comes to doing their due diligence in risk management, delivering professional services, and carrying adequate professional liability insurance coverage. Otherwise, they may face costly legal consequences.
Legal liabilities that accountants may face
Accountants have a duty to their clients and a standard of care that is applicable to their services. Violations of the standards may result in disciplinary action. Assertions in a professional liability claim may include:
Breach of contract
If you have a written agreement with your client and you do not fulfill the terms of that agreement, a client could assert a breach of contract.
Fraud
If a client believes there was an intentional misrepresentation or intent to deceive, and the client relied on the false information, a client can allege fraud.
Negligence
Failure to comply with the professional standards applicable to the service could result in a negligence claim.
What are the risks for an accountant going bare?
There are many risks associated with going bare and foregoing professional liability insurance, including:
Legal risks
Human errors and omissions, like mistakes in financial records or poor financial advice, are examples of negligence. If these occurrences result in a loss by a client, they can bring a lawsuit against you or your practice.
Financial risks
Financial risks of not carrying adequate professional liability coverage include the payment of legal expenses and any resulting settlement or judgment. A lawsuit may increase future insurance premiums and make it more difficult to secure coverage. For small firms especially, the financial hardship of a lawsuit could necessitate extreme measures, like filing for bankruptcy.
Reputation risks
The risk to a CPA’s or accountant’s reputation can be significant. Involvement in lawsuits can be damaging to an accountant’s or firm’s image. If a suit gains media coverage, it may be difficult to recover.
Personal risks
CPAs and accountants risk their mental health and may suffer emotionally and psychologically due to the stress of a demand or lawsuit situation.
What are some common reasons accountants get sued?
CPAs and accountants are sued for a variety of reasons, which may include:
- Making an error on a tax return
- Failing to provide advice
- Providing incorrect advice
- Filing a tax return late
- Failing to detect embezzlement at a client’s organization
- Failing to identify a filing obligation
- Not detecting a misstatement or disclosure error in a client’s financial statements
Why should accountants consider professional liability insurance?
There are many reasons why CPAs and accountants should explore professional liability insurance to address the risks mentioned above including:
- It can help to protect a CPA’s reputation.
- It can cover defense costs, as well as any additional settlements or judgments that can result from a lawsuit.
- It offers peace of mind so CPAs can stay focused on client work.
Bottom line: professional liability coverage is a smart choice for CPAs
Going bare isn’t a decision to make lightly. But if your firm hasn’t opted to take out professional liability coverage yet, there’s no time like the present. Take some time to consider the risks you and your firm face on an ongoing basis and ask yourself what you would do if a situation occurred that required a legal defense, and how you would feel about the possibility of paying attorney fees or a settlement out of pocket. You may ultimately determine that professional liability coverage is a smart decision you could make for your firm’s future.