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. It’s important to recognize that accountants and CPAs may be held responsible for losses related to their services.

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

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, which can be especially challenging for smaller firms.

The Role of Professional Liability Insurance

And yet, many CPAs and accountants, particularly small firms, forego professional liability coverage to manage expenses. This may be short-sighted, as the cost of a malpractice claim can be financially devastating to a CPA firm, and smaller firms often have fewer resources to absorb legal costs. That’s why it’s critical for firms to understand their risks, their liability and their coverage options before deciding to “go bare” or abstain from carrying professional liability insurance. There are many reasons CPAs believe they don’t need professional liability coverage, including these myths:

• Small firm clients don’t sue, so we don’t need professional liability insurance.
• 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.
• We’re more likely to be sued if we’re insured.
• TRUTH: When faced with losses, anyone can 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.
• We’re managing our risks.
• TRUTH: Mitigating risks doesn’t mean avoiding them altogether. Sometimes the unexpected happens, regardless of firm size.

Common Types of Claims

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.

Risks of 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.