Magazine article The CPA Journal

Importance of Having Insurance

Magazine article The CPA Journal

Importance of Having Insurance

Article excerpt

Many accountants performing tax preparation and write-up services have chosen not to purchase professional liability insurance because of its current high cost. While it is true that these types of services generally entail less risk than audit and other services involving verification procedures, they are not wholly free from liability exposures, a fact that many accountants are coming to appreciate. Indeed, approximately 40% of all claims filed against accountants arise out of tax preparation services.

To be sure, the cost of professional liability insurance is substantial, and the chances of incurring a claim in any given year are slightly less than 1% per professional. Therefore, a firm with three professionals would have roughly a 3% chance of incurring a claim in any given year.

These statistics have prompted many accountants to try to play the liability lottery, hoping they can escape liability and pocket the money they would otherwise pay for insurance. The risks of losing this lottery, however, can be enormous and could easily threaten the financial security of the losers, if not force them into bankruptcy.

The often overlooked problem is that without liability insurance, an accountant is unlikely to be able to afford the costs of defending against a liability claim, thereby becoming vulnerable to the plaintiff's allegations. This fact was recently dramatically exemplified in the case of an accountant who had been performing tax preparation and write-up services for a small business which was victimized by a $400,000 embezzlement by its bookkeeper. The client sued the accountant seeking to recover that amount, alleging that the accountant should have uncovered the embezzlement in the course of reconciling the client's bank account.

On its face, the plaintiff's claim seemed reasonable and could clearly survive both a motion to dismiss and a motion for summary judgment, forcing the accountant to have his case tried before a jury. On the other hand, the accountant had several good defenses, including the fact that a significant portion of the plaintiff's claim was barred by the statute of limitations. Perhaps more important, the nature of the accountant's engagement was not one that could have reasonably been relied upon to uncover such a defalcation, and the plaintiff himself had ignored the accountant's advice not to place so much trust in the bookkeeper. Unfortunately, the accountant's lack of insurance precluded him from defending on any of these grounds. He simply did not have the funds to pay the considerable costs of defending against this claim. …

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