Damage Control for Professional Liability

By Goldwasser, Dan L. | The CPA Journal, July 1991 | Go to article overview

Damage Control for Professional Liability


Goldwasser, Dan L., The CPA Journal


The increasing number and severity of liability claims against CPAs intensifies the need to consider the format of accounting firms and personal assets in the event that claims exceed available liability coverage. The author presents an update of material published in December 1986 which is even more pertinent now. This article includes information about recent changes in the states' professional corporation laws and, most importantly, advice for protection of individual assets. The current liability climate requires all practitioners to reconsider their defenses against ruinous professional liability claims.

The threat of professional liability has become more ominous to CPAs with the recent downturn in the U.S. economy, as the number of suits brought each year against accountants is largely a function of the health of the national economy. Equally distressing is that such suits, on average, are resulting in larger monetary awards. These trends mean that in the next few years, many CPAs will likely be defendants in professional liability suits. The significance of these developments was recently underscored by the sudden demise of Laventhol & Horwath.

In the past, the accounting profession has sought to avoid litigation by adopting detailed written practice standards and quality control procedures. Although these measures have helped to improve the overall quality of practice among CPAs, they have done little to eliminate the nightmare of professional liability litigation, as the public's expectation of CPA performance has either kept pace or has increased at the same time.

The accountant's second line of defense traditionally has been to purchase professional liability insurance. Such insurance has been generally available in virtually unlimited amounts, covering every type of claim, save only those in which there were findings of intentional or fraudulent misconduct. Unfortunately, the cost of such insurance is currently four times higher than it was 10 years ago, with the result that many firms have decided to reduce, or even forego insurance coverage. Moreover, accountants are now forced to accept policies with sharply curtailed coverage. In addition, most professional liability policies provide that legal fees and other related costs of defending a claim are charged against the policy limits. Thus, accountants are not only faced with a rapidly increasing liability exposure, but also with diminished insurance protection.

Many CPA societies have sought to have their state legislatures adopt "privity" legislation limiting the scope of persons who can sue an accountant on a negligence standard. To date, Illinois, Kansas, Arkansas, and Utah have adopted such legislation. Others have sought similar protection from the courts. At present there are eight states that have adopted privity or near privity rules via the courts: New York, Colorado, Delaware, Idaho, Indiana, Nebraska, Nevada, and Pennsylvania. More recently, the AICPA has embarked upon a campaign to have states permit the practice of accountancy in "limited liability" corporations to further protect the assets of accounting firm owners from vicarious liability. These efforts alone, even if successful, will not completely remove the threat of personal liability and financial ruin that CPAs currently face.

The AICPA's Council has approved an amendment to Rule 505 of the Institute's Code of Professional Conduct, which, if adopted by the membership, will permit the practice of accountancy in business corporations. Typically, under state law shareholders of business corporations are shielded from personal liability resulting from the actions of others. The laws of most states, however, currently require professional firms to conduct their practices through either a partnership or a professional corporation. In contrast to shareholders in a business corporation, each member of a partnership is personally responsible for the liabilities of the partnership, regardless of their cause. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Damage Control for Professional Liability
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.