What do a basketball star Kevin Garnett, real estate veteran Steve Brincefield, a bank, and Alyssa Milano all have in common?
They’ve all sued an accountant.
Accountants, like many other types of certified professionals, are at risk for lawsuits. Due to the nature of their services, they’re considered a high-risk litigious industry.
It’s almost ironic that a profession so focused on minimizing financial risks for others faces so much financial risk themselves. But in a world where over 100 million lawsuits are filed a year, the chances of being sued as an accountant are very real.
While it’s impossible to determine the chances of an accountant being sued, it is possible to narrow down common exposures and determine best practices for avoiding litigation as an accountant. If you’re an accountant concerned about your litigious risks, read on to learn about common insurance claims and how you can avoid becoming an example.
Common insurance claims against accountants
As an accountant, you can perform every task to near perfection for a client and still be at risk for a lawsuit. Unfortunately, the tiniest hiccup can leave you at risk. But because walking on eggshells is no way to conduct business, familiarize yourself with the most common professional liability claims against accountants.
A client’s audit shows inventory and assets were overstated. Unfortunately, it’s too late to recoup any overpayments and they sue for reimbursement.
An accountant makes a mistake while preparing a yearly budget for a global company. The mistake isn’t caught on time and the company finds themselves in financial trouble as a result. A lawsuit quickly follows.
Third party lawsuits
There are some lawsuits that are virtually unavoidable. One type is third party lawsuits. Many accountants are surprised to learn that 30% of accounting lawsuits are filed by third parties. For example, if a client goes bankrupt, their lenders or business partners may seek to recover losses by filing a lawsuit against their accountant.
How much does an accounting lawsuit cost?
There’s no set number but the cost of a lawsuit can quickly rise. The average cost for a liability suit starts at $54,000. If you’re being taken to court over a contract dispute, you could be pushing $90,000 or more.
It’s not just about monetary costs either. There’s also the cost of your time and health (lawsuits certainly aren’t relaxing). While you may think it’s best to jump in the ring and fight your accuser, especially if the lawsuit is frivolous, this isn’t always the best answer.
An accounting lawsuit can be a long and exhausting process. Legal costs alone can quickly get out of hand and there’s no guarantee you’ll walk out of a courtroom with dismissed charges. Because of the risk going to court entails, it’s often recommended that accountants settle outside of the courtroom. Sometimes, just offering to refund fees or pay a small settlement is enough to wipe a lawsuit off your brow and move on.
How accountants can protect themselves
There are many proactive measures accountants can take to protect themselves from frivolous lawsuits.
Follow processes and procedures
Feel free to be as disorganized as you want at home. In the office, an accountant must be meticulous. Every task, job, and project should follow a strict process. This can help you avoid common lawsuit sources, like
- Clerical errors
- Performance-related claims
- Breach of professional duty
- Professional negligence
As an accountant, you may think your math skills are the most important. But your conversational skills are just as crucial to develop and flex. According to the Journal of Accountancy, 55% of accountant lawsuits are based on misunderstandings about what’s included in tax services. Avoid relying on one avenue of communication with clients. When you discuss important matters over the phone, follow up with an email that summarizes your discussion. Require signatures on information communicated through paper or digital form. Avoid assuming a client understands your process, even if they’ve been through it before.
Purchase the right insurance policy
You can’t operate as an accountant without the right insurance policy. Chances are, you WILL face litigation at some point in your career. That’s not the concern. The concern is being caught off guard and not having the proper protective measures in place. Here are a few different types of policies every accountant should consider.
Professional liability insurance
Professional liability insurance is necessary for all accountants. It covers legal costs, discovery costs, and damages resulting from claims related to your services.
General liability insurance
This type of coverage isn’t always required for accountants. It should be considered if you work in a physical location that clients visit as it offers protection against bodily injury claims.
Employment practices liability insurance
An EPLI policy protects you from potential employee-related claims, such as discrimination, harassment, and wrongful termination suits. The larger your firm, the more you should consider this coverage.
Cyber liability insurance
You have a lot of sensitive information floating around in your client files. A data breach could spell disaster. Cyber liability insurance helps you with the costs of notification, repairing identities, and mitigating damage to your reputation.
E&O exposure for accountants is becoming more common and preventing every claim isn’t always feasible. But what every accountant can do to protect themselves is purchase professional liability insurance and additional policies as necessary to protect their reputation, livelihood, and clients.