Accounting for Risk
6 Ways Accountants Can Prevent Malpractice Lawsuits

A malpractice lawsuit could leave your accounting firm with tens of thousands of dollars in legal costs and tarnish your reputation. While Malpractice Insurance (also known as Errors and Omissions Insurance or Professional Liability Insurance) can pay for your legal bills, it's better for your accounting firm to avoid any legal trouble in the first place.

It's impossible to prevent all accounting errors, but you can adopt strategies to minimize your risk, improve your relationships with clients, and avoid certain situations that are more likely to lead to malpractice cases.

Limit Your Risk Exposure: 6 Methods to Prevent Malpractice Claims

Each accounting firm varies, so you'll have different professional liability risks. But there are a few basic things all independent accounting firms can do to reduce their malpractice risks:

#1: Follow procedures.

Follow professional audit or accounting procedures.

Auditors can prevent 63 percent of their lawsuits by following the American Institute of CPAs' Generally Accepted Auditing Standards New browser window icon. [PDF]. Even auditors who intimately know GAAS can make mistakes, but it's still crucial to follow professional standards and adopt workplace procedures that make sure your employees are doing the same. (See our By the Numbers page for more data on your risk factors).

#2: Converse.

Improve your client communication skills.

Accounting and auditing is as much about service and communication as it is about technical skills. It's important to keep your clients satisfied with progress updates and presenting your business in a professional manner. Improve your communication by sending follow-up emails to confirm any work requests, establishing protocol for employee and client interactions, and documenting any over-the-phone and in-person conversations.

#3: Document.

Use retention and engagement letters.

It's crucial for accountants to use clear engagement letters that define the scope of your work, clearly outlining what you will and will not do. This avoids any miscommunications and provides evidence of fulfilled professional responsibilities. (See "4 Things to Include in an Engagement Letter").

#4: Consider arbitration.

Consider arbitration rather than going to court.

If you're sued, you may have the option of going to an arbitrator rather than taking the case to court. This is generally a good option because arbitration hearings take less time than lawsuits. In addition to speediness, arbitration hearings give accountants the opportunity to explain their case in front of a technically-minded arbitrator who understands GAAS and other professional standards. Make sure your contracts include a provision to allow for arbitration hearings.

#5: Settle.

Settle out of court.

Many lawsuits are settled before they go to court. A settlement is an out-of-court agreement between yourself and your client. The client will agree to withdraw the lawsuit and you'll agree to pay some damages. Your Errors and Omissions Insurance covers settlements as well as court-mandated damages you owe your client.

#6: Avoid "deals."

Avoid business deals with clients.

If you work with many start-ups and small businesses, you might have an opportunity to invest or have a business relationship beyond the accountant and client relationship. However, these conflicts of interest can lead to headaches down the road and drastically increase the odds that you're sued.

These six strategies can help you prevent lawsuits and find less expensive ways to settle a dispute with a client. For more on managing your malpractice risks, read our article, "4 Reasons Clients Sue Accountants (and What to Do if You're Sued)."

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