Insurance companies are firsthand witnesses to losses and lawsuits incurred by professional accounting firms. While insurance companies obviously want to minimize payouts, it is certainly in CPAs' best interests to protect their reputations and business operations. Although general risk management resources can assist any business owner, those targeted to accounting firms provide the best detail and immediately actionable ideas. Two insurance companies in particular present free public information: Insureon and Landy Insurance. Readers are also encouraged to see their own provider's websites for access to subscriber-only tools.
Insureon, based in Chicago, specializes in small business insurance for accounting and financial professionals. It offers a substantial number of free materials on its website (https://financial.insureon.com), including articles on risk management, contracts and engagements letters, and online security. Insureon also sprinkles some interesting statistics around its webpages, collected from popular accounting practice journals and business studies.
One useful article addressing general management advice for preventing risk events is “5 Ways to Protect Your Accounting, Tax Preparation, or Finance Business” (http://bit.ly/2lhORxp). Step one is to secure data by establishing a network firewall, creating physically secure environments, and maintaining backup hard and electronic data and document copies. Step two is to avoid calculation and other preventable errors (a large source of lawsuits against CPA firms) and maintain friendly and respectful relationships with clients to minimize their inclination to bring suit. Step three is to communicate clearly and professionally with staff and clients. Step four is an attention getter: promote a healthy work-place environment—with several detailed suggestions, making this well worth the reader's time. Lastly, step five emphasizes the protection of equipment from damage and theft.
In the Accounting for Risk series, “4 Reasons Clients Sue Accountants (and What to Do if You're Sued)” states that the four most common reasons for malpractice suits are 1) a sudden negative change in a client's financial situation, 2) accountants becoming targets when a client suffers from fraud, 3) a client's attorneys knowing that accountants carry professional insurance to cover damages, and 4) third parties affected by a client bankruptcy suing the accounting firm (http://bit.ly/2ky3HeB). Apparently, CPAs are commonly believed to have deep pockets. Formal agreements, such as retention or engagement letters, help to prevent misunderstandings and limit liability. According to another article, “4 Things to Include in a Retention Letter” are the engagement scope and exclusions, delivery deadlines, a payment agreement containing a provision to terminate service upon non-payment, and a cyber liability disclaimer (http://bit.ly/2kqrVMG). CPAs should also be aware that such a disclaimer may not be upheld in court; still, being proactive increases a client's understanding of the potential problems in advance. Finally, “When It Makes Sense to Settle a Professional Liability Lawsuit (Even if You've Done Nothing Wrong)” explains the tedious, time consuming, and expensive process for being sued by a client (http://bit.ly/2l8vvba). Even if he accountant is not at fault, cost containment may make settlement the best option. The settlement agreement can include prohibiting the (former) client from talking about the case and denigrating the firm's reputation, and thus hopefully minimize loss of other business.
“Small Business, Big Numbers: An Accountant's Guide to Landing and Keeping Small Business Clients” is a 28-page ebook available as a downloadable PDF (http://bit.ly/2kT2UIo). The booklet provides tips for attracting and working with small business clients; more importantly, there are interesting statistics that will give CPAs confidence that small businesses need what they have to offer (for example, 46% of small businesses are not currently working with an accountant). The guidebook also outlines study results that indicate exactly which services entrepreneurs say they need and are willing to pay for, such as business planning and business strategy consulting.
Landy Insurance is a familiar name to CPAs, having provided professional liability insurance since 1949. The Landy website has separate main pages for tax preparers and bookkeepers (http://www.landy.com/abc_number1.html) and accountants (http://www.landy.com/cpa_number2.html). Landy customers also have access to a risk management website.
Insurance companies are firsthand witnesses to losses and lawsuits incurred by professional accounting firms.
Two excellent resources that are available to the general public and make the Landy website worth accessing. “Top Ten Ways for an Accountant to Avoid Being Sued” is an attention-getting title and a useful two-page PDF (http://bit.ly/2l8yLUj). The first is to obtain an engagement letter to define the scope of services, as well as to spell out specific limitations on the accountant's responsibilities. Number 10 is to respond to client messages in order to retain clients and maintain a positive relationship. Other points include meeting deadlines, communicating clearly on the nature of services and what they will cost, and being realistic about a CPA's expertise to complete a project.
“Risk Management for Accountants: When Your Clients Aren't Your Friends Anymore” is a 25-page outline by litigator George J. Coleman covering changes in an accountant's exposure, common tax malpractice claims, risk management tips, and what to do (and to expect) if an accountant becomes the subject of a claim (http://bit.ly/2kqyH51). Exposure issues are affected by the nature and length of the relationship with a client. In addition, the accountant may be held to a fiduciary standard, the knowledge of staff accountants delivering the client service may be imputed as known by upper management, and a one-time consulting engagement may be deemed to continue if the firm performs other work for the client. The most common malpractice claims include tax advice and return preparation errors and simple mistakes, such as missing deadlines or making blunders on tax filings. Coleman offers suggestions to avoid these. Risk management tips are lengthy and begin with “don't promise the moon in your promotional materials.” No doubt influencing the booklet's title, the author advises “don't do business with your clients”; in other words, don't invest in clients' projects or accept commissions, even if there are no apparent ethics constraints.