The Modern Accountant’s Liability Exposure

January 11, 2016

Accountants have long recognized the value of maintaining liability insurance to protect their practices in the event of a professional error or dispute with a client. Most accountants renew their policies regularly, assuming the coverage they’ve had for years will continue to protect them.

Accounting practices are evolving, however, to include things like investment advice, trustee services and other fiduciary obligations.  Additionally, recent publicized scandals have shifted the public’s perception of accountants, causing an increase in claims or threats of suits.  As a result, accountants who did not purchase professional liability insurance now recognize the need.

With practices taking on new kinds of services and perceptions changing, it’s important to be sure your liability insurance policies are protecting all facets of your business.

Cyber Liability
Accountants retain considerable amounts of sensitive personal and financial client information. Names, addresses, social security numbers, employment, and other data must be maintained in order to complete tax returns and audits. If this information is compromised, there is a significant risk to the accounting firm and few professional liability policies today include cyber liability coverage.

Consider this: your computer is hacked by someone that logs into the system, downloading client records to file fraudulent tax returns, directing refunds to P.O Boxes they control. You only discover the breach months later when you realize all client returns have already been filed and paid out to the wrong person.

Besides the exorbitant costs associated with a breach, accountants could be subject to major penalties, fines, and even civil or criminal proceedings under numerous federal and state privacy laws and regulations.  And more than just data is on the line – breaches can destroy an accountant’s reputation.

The number of cyber incidents affecting accounting firms has increased nearly ten times in the past decade. The median cost of a loss is $800,000. And don’t make the mistake of thinking that only large firms are at risk—57% of breaches took place at small firms.

Basic security measures to reduce the risk of data breach include:  reviewing access controls, appraising cloud-based service contracts, training and monitoring employees, consulting with cyber security firms, and practicing a data breach response plan.

Financial Advice Liability
People are relying on their accountants even more for advice on investments and other financial services, as confidence and trust levels in investment advisors and brokers have declined following the financial crisis of 2008. Giving advice in this area exposes an accountant to considerable risk. There have been a number of high-profile cases in the news recently, including a $10 million settlement between recording star Rihanna and her accountant, whom she alleged advised her to buy a $7.5 million home which turned out to be  rotting from water and mold damage forcing her to spend another $1 million on remediation costs before it was ultimately sold at a significant loss.

If you are registered with the SEC or state securities authorities to provide investment advice, you’ll need to be even more careful as your fiduciary duty and fundamental obligation to provide suitable investment advice is that much greater.

Trustee Liability
Careful consideration is essential to minimizing risk when an accountant becomes a trustee. The Probate Code mandates certain duties of trustees for beneficiaries, including administrative, investment and accounting. Accountants acting as fiduciaries to each beneficiary risk further exposure if they breach any one of these duties. Given their training and expertise, accountants are held to a higher standard than a family member when acting as trustee.

To help mitigate the risk, accountants should obtain a hold harmless clause in their trustee contract and read the trust carefully. Make sure there is a provision to include:  resignation if necessary, indemnification in the trust, and the authority to hire professionals, like attorneys and financial planners, to help should the need arise. Also ensure your professional liability policy extends coverage for claims brought against an accountant when assuming the additional fiduciary responsibility of a trustee.

Protecting yourself
These new risks can be mitigated by being relentless in complying with all statutes and regulations. But even that may not be enough. Review your professional liability insurance policies to make sure you are protected against these liabilities. Many new policies can include coverage for cyber and expanded fiduciary risks, or you may be able to add riders to your existing policies.

You work hard to stay abreast of the changes in accounting standards and regulations. Make sure you are also protecting your practice from new risks in this ever-changing environment.