While it may seem like a low-risk way to expand your services and client base, bookkeeping work — like all accounting practices — exposes your firm to specific risks that you should be prepared to guard against.
Because each type of accounting work comes with different liability exposures, let's look in detail at the kinds of risks that accompany bookkeeping work and what you can do to manage them.
4 Risks that Can Lead to Lawsuits against Bookkeepers
Risk management requires that you identify your biggest risks and have a strategy to minimize them. So what risks do bookkeeping firms have? If you plan on adding bookkeeping to your menu of accounting services, be prepared for these four risks:
Sometimes the most mundane work is where you're most likely to make a mistake. When you're in charge of processing paperwork, it's easy to zone out for a minute or make a mistake when entering data in your accounting software.
#2: Scope of work.
Miscommunications about scope.
A bookkeeper may think they're performing one specific task for a client, while the client expects much more. AccountingWeb offers this example : a bookkeeper might think they're only processing financial records, while a client assumes they're also monitoring the client's accounts for signs of fraud. Disagreements about the "scope" of your work can lead to lawsuits. In their contracts, bookkeepers need to explain to their clients what they will do and won't do. (Learn more about improving client communications in "4 Things to Include in a Retention Letter").
#3: Cyber liabilities.
When your business has access to a client's financial records, your cyber risk exposure goes through the roof. Say a client gives you access to their network — suddenly you're liable if your account gets hacked or cyber criminals steal your password. In addition, you'll have to protect any client data stored on your network. Even if you don't think you keep data on your computer, you might have sensitive data stored in your email from exchanges with clients (see "5 Things in Your Email that Can Tank Your Practice").
#4: Property damage.
When you're crunching numbers it's easy to forget that your liabilities include physical accidents. If you have to visit a client's office to review financial records and work behind their firewall, you could accidentally damage their property by spilling a drink on a computer, tripping over a power cord, or committing other accidental property damage.
Small Business Insurance for Lawsuits against Bookkeepers
So how do you cover these four bookkeeping risks? Your risk management plan should include these three bookkeeping insurance policies, which can cover the cost of lawsuits:
- Bookkeeper's Professional Liability Insurance (also known as Errors and Omissions Insurance) pays your legal costs when clients sue you over errors in your work. Inaccuracies, miscommunications, and other errors are all covered.
- General Liability Insurance covers property damage and bodily injuries you may cause to your clients and other third parties.
- Cyber Liability Insurance covers the cost of data breaches that occur on your firm's computers, devices, and networks.
If you're thinking about starting your own bookkeeping firm or expanding your firm's offerings, don't be caught off guard by your increased risk exposure. Chat with your insurance agent any time you offer new services to ensure that your coverage is adequate for your current risks.