A malpractice lawsuit can be devastating for an accountant. A lawsuit can take years to come to completion, which means you'll be working back and forth with lawyers for an exhausting period, full of uncertainty.
To make matters worse, a lawsuit will enter the public record. When people search online for your accounting firm, news stories might pop up about the malpractice claim. Having your firm's name attached to malpractice claims can be potentially devastating, especially for small practices that are trying to build their reputation.
Given how disastrous a malpractice case can be, it's crucially important for accountants to have small business insurance and a risk management plan that minimizes the likelihood of a lawsuit. To help you, we've provided this guide that explains the common reasons accountants can be sued.
4 Reasons Accountants Can Be Sued
4 Reasons Accountants Can Be Sued in a Malpractice Lawsuit
The most meticulous of accountants will make a mistake at some point in their careers. That's reality. Even if you always follow the American Institute of CPAs' Generally Accepted Auditing Standards protocol, there's always the chance you'll overlook suspicious activity, fail to catch fraud, or make a mental error. Let's look at four common reasons that accountants can be targeted in a malpractice lawsuit:
- A sudden change in your client's financial situation. Fraud, losses, an acquisition or deal gone sour — these things could suddenly ruin the client and accountant relationship. How do you prevent bad blood between you and your clients? It's important to document every business agreement in writing. If you make a verbal agreement, always send a follow-up email to your clients for confirmation. Documenting all communication can help settle disputes that arise.
- Client lawyers will look to sue everyone. Say fraud is committed against your client. Your client's lawyers will likely say that they should look into suing their accountant. Right or wrong, accountants often get blamed for fraud. While you didn't commit fraud, clients will blame you for not catching it, even if it isn't a part of your job description.
- Client lawyers know that you have "deep pockets." Because accountants have Errors and Omissions Insurance (also known as Malpractice Insurance or Professional Liability Insurance), client lawyers recognize a potential payout source. Because business insurance pays for the damages you owe clients when you lose a lawsuit, a client's lawyers may attempt to sue you, knowing your insurance can pay out.
- Third parties, lenders, and other people can sue you. Did you know that 30 percent of accounting lawsuits are filed by third parties? If a client goes bankrupt, their lenders, shareholders, and business partners could file a lawsuit against you seeking to recover their losses. (See our By the Numbers page for more accounting lawsuit statistics).
Your Accounting Firm is Sued: What's Next?
Your Accounting Firm is Sued: What's Next?
If your accounting firm is sued, what should you do? Begin with these three simple steps:
- Contact your insurance agent or provider. Your Errors and Omissions Insurance policy can pay for lawyers to defend your business, so you'll want to have your agent on the line immediately. Even if you only suspect a claim is possible, such as if a client is about to go out of business or if a major acquisition has hit a financial snag, don't hesitate to talk with your insurance agent.
- Weigh your options. If your clients have a good case against your accounting firm, you might want to settle out of court rather than duke it out. If your client's claim is frivolous and there's a good chance you'll win the case, you and your lawyers will prepare your arguments.
- Be prepared for a long fight. As we mentioned in the outset, lawsuits can take years. Even if your client doesn't have a legitimate case, you still have to address the claim.
Regardless of whether you win, lose, or settle the lawsuit, your E&O Insurance can pay for a malpractice claim against your company. Though lawsuits are exhausting and damaging to your business's reputation, your small business insurance will give you peace of mind with coverage for your financial losses.